!     !  I 


iiiii 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

GIFT  OF 

Fhili^  D.   Suins 


THERE  ARE  SEVERAL  TYPOGRAPHICAL 
ERRORS  IN  THIS  BOOK  WHICH  WILL 
NOT  OCCUR  IN  THE  NEXT  EDITION. 


STRANGLE  HOLD 


By 
H.  C.  CUTTING 


1921 
M.  A.  DONOHUE  &  CO. 

CHICAGO 


Copyright 

H.  C.  CUTTING 

1921 


Published  April,  1921 


Copyrighted  in  Great  Britain 


1^1 

TABLE  OF  CONTENTS 

CHAPTER  PAGE 

I     The  Bar  to  Prosperity 1 

II     Evolution  of  Our  Exchange  System    .      .  16 

III     The  Medium  of  Exchange  a  Public  Utility  31 

IV     The  Industrial  Strait-jacket    ....  46 

V     "Frozen  Credits" 63 

VI     A  Perfect  Exchange  System    ....  84 

VII     100%  Safety  and  Elasticity    ....  101 

VIII     Breaking  the  Strangle  Hold    .      .      .      .  128 

IX     Modern  Feudalism 151 

X     Interest 163 

XI     The  Geld  Standard 175 

XII     Speculation 188 

XIII     Rural  Credits 198 

XIV     The  Federal  Reserve 214 

XV     The  Conservative  Banker 

and  His  Reserve  Joke 232 

XVI     Foreign  Exchange 247 

XVII     National  Efficiency 266 

XVIII      Conclusion 275 

Appendix 297 

Index 319 


^~s«r>  r^  -f^  r:<  -^ 


CHAPTER  I 

THE  BAR  TO  PROSPERITY 

AVE  you  ever  had  a  door  slammed  in  your  face? 
If  so,  surprise  was  your  first  emotion,  no  doubt, 
then  astonishment  that  such  an  unexpected  thing  should 
happen.  This  feeling  probably  gave  way  to  one  of 
anger,  of  resentment  at  being  so  imcivilly  treated. 
Especially  would  such  an  occurrence  irritate  you  if  the 
weather  were  cold  and  your  overcoat  were  behind  the 
door. 

After  a  while  a  question  would  probably  spring  up. 
Who  slammed  the  door?  Why  was  it  done.''  There 
was  no  one  you  could  think  of  who  might  have  a  reason 
for  closing  the  door  against  you.  Perhaps  it  was  done 
unintentionally.  Or,  perhaps  it  was  the  wind  that 
slammed  the  door. 

Suppose  this  door  were  the  door  to  success  and  pros- 
perity !  Would  it  not  be  interesting  to  know  what  closed 
it  and  why  it  was  closed.''  And  would  it  not  be  much 
more  interesting  to  know  how  to  open  it  and  how  to  keep 
it  from  being  closed.'' 

Well  that  is  just  what  we  are  talking  about — the  door 
to  prosperity.  And  our  object  is  to  answer  both  these 
questions.  First  we  must  see  clearly  what  shuts  the  door 
and  then  we  can  devise  a  means  for  keeping  it  open.  It 
will  be  shown  that  success  and  prosperity  can  be  made 
accessible  to  all  at  all  times. 


2  THE  STRANGLE  HOLD 

Of  the  several  millions  of  business  men  who  have  had 
occasion  to  seek  a  loan  from  a  bank,  it  is  likely  that  a 
large  majority  have  had  the  bank  door  slammed  in 
their  faces  at  some  time  or  other  during  their  career. 

The  time  generally  comes  to  most  business  men  when 
they  need  more  cash;  and  to  get  it  they  naturally  go  to 
the  logical  place — the  bank.  Perhaps  you  have  been 
there  and  offered  to  put  up  maybe  three  or  four  to  one 
in  security  for  a  loan. 

After  explaining  the  plan  and  showing  the  security 
you  are  fortvmate  if  you  have  never  received  from  the 
banker  the  following  answer:  "Your  securities  are  good, 
and  your  enterprise  is  a  worthy  one.  We  will  admit  it 
is  a  success  and  we  would  like  to  help  you  by  making 
this  loan,  but  YOUR  SECURITIES  ARE  NOT 
BANKABLE." 

If  you  have  received  this  answer  you  were  perhaps 
angered  and  applied  at  another  bank.  Probably  the 
same  answer  was  received  from  the  next  banker,  and  the 
next,  although  you  sought  to  make  the  loan  more  at- 
tractive each  time  by  increasing  the  bonus  or  seciirity 
offered. 

If  you  are  a  merchant  or  broker,  and  have  never  at- 
tempted to  borrow  except  upon  self-liquidating  security, 
you  may  not  have  had  an  experience  comparable  to  this ; 
but,  if  you  are  a  manufacturer  or  producer  of  any  kind 
— and  especially  a  farmer  desirous  of  extending  your 
enterprise — you  wiU  certainly  recognize  the  above  an- 
swer as  a  set  formula. 

But  it  may  be  that  you  are  not  engaged  in  business 
and  that  you  have  never  tried  to  borrow  money  from  a 


THE  BAR  TO  PROSPERITY  $ 

bank  and  that  you  never  expect  to.  So,  you  may  think, 
bank  loans  do  not  concern  you. 

It  will  soon  appear,  however,  that  we  are  all  interested 
in  every  bank  loan  for  the  bank  door  is  the  door  td 
prosperity. 

Real  prosperity  is  not  the  piling  up  of  wealth  by  a 
few,  but  the  giving  of  the  best  to  the  majority  with  the 
least  effort  on  the  part  of  the  individual — it  is  the  satis- 
faction of  the  community's  wants  as  completely  as  pos- 
sible at  the  lowest  cost.     This  needs  no  argument. 

Now,  in  the  above  example  where  the  loan  was  refused 
by  the  banlc,  it  has  been  admitted  by  all  that  the  enter- 
prise is  a  good  one.  The  bankers  all  said:  "Your  en- 
terprise is  a  worthy  one."  In  other  words,  it  is  one 
which  would  result  in  more  efficient  production — in  the 
end  it  would  lead  to  a  more  complete  satisfaction  of 
society's  wants  at  a  lower  cost.  It  would  lead  to  greater 
prosperity.  And  the  one  thing  that  was  still  necessary 
to  the  success  of  this  enterprise  was  a  loan  from  the 
bank.  The  loan  was  refused  although  the  security  was 
good.  The  enterprise  could  not  be  carried  out  because 
a  good  security  was  not  bankable.  The  only  conclusion 
is  that  the  banker  acted  as  a  hindrance  to  prosperity. 

It  seems  then  that  something  is  wrong,  and  that  thi^ 
something  is  concerned  with  the  bank.  But  do  not  pro- 
ceed at  once  to  blame  everything  upon  the  banker.  Re- 
member, it  may  have  been  the  wind  that  slammed  the 
dooi*. 

Let  us  proceed  further,  and  see  if  there  is  anything 
more  to  be  noted  which  will  show  us  wh^l'fe  the  fault  is; 

Since  the  farmer  is  one  of  the  most  ihaportant  mero- 


4  THE  STRANGLE  HOLD 

bers  of  our  industrial  organization,  food  being  the 
first  of  our  necessities,  and  it  being  the  farmer's  busi- 
ness to  supply  it,  let  us  take  his  case. 

When  the  farmer  is  in  need  of  a  loan,  and  applies  for 
it  at  tlie  bank,  what  happens  ?  He  is  willing  to  give 
perfectly  good  security — a  mortgage  on  his  farm.  The 
loan  is  nevertheless  refused,  because  the  security,  while 
good,  is  not  bankable. 

Unable  to  get  the  necessary  facilities  for  carrying  on 
business  the  farmer  cannot  carry  out  his  projected  im- 
provement, and  society  suffers  from  a  lesser  degree  of 
prosperity  thaa  would  otherwise  have  been  possible. 

An  effort  was  made  to  assist  the  farmer  through  the 
adoption  of  the  Farm  Loan  Act  in  1916.  Without  en- 
tering extensively  into  this  matter,  it  will  be  sufficient 
at  this  point  to  say  that  this  act  was  of  some  assistance. 
It  provided  a  cumbersome  means  by  which  the  farmer 
could  obtain  some  of  the  capital  necessary  for  per- 
manent improvements.  But  while  it  did  some  good,  it 
was  at  best  very  deficient.  And  furthermore,  the  passing 
of  a  special  law  to  give  financial  relief  to  the  farmer 
is  in  itself  a  confession  that  the  banking  system,  the 
ordinary  means  of  supplying  credit,  is  inadequate. 

That  the  Farm  Loan  Act  did  not  overcome  the  in- 
adequacy of  the  banking  system  as  regards  the  farmer 
is  proved  by  the  fact  that  Congress  has  recently  re- 
instated the  War  Financing  Corporation. 

This  institution  was  erected  during  the  war  for  the 
purpose  of  financing  industry  made  necessary  by  war 
but  now  it  has  been  rehabilitated  as  another  means  of 
taking  care  of  the  farmer's  financial  needs.     It  will  not 


THE  BAR  TO  PROSPERITY  5 

do  the  work  required  of  it  for  it  cannot  reach  the  "sore 
spot"  as  will  presently  be  shown. 

WTien  the  exporter's  troubles  began  to  get  on  our  in- 
dustrial nerves  Congress  passed  what  is  known  as  the 
Edge  Act  as  an  amendment  to  the  Federal  Reserve  Act. 
Under  this  law  a  large  group  of  bankers  is  now  attempt- 
ing to  form  a  Foreign  Trade  Financing  Corporation  with 
the  hope  of  reviving  our  drooping  export  and  shipping 
business.  There  is  no  hesitancy  in  saying  that  even  if 
they  succeed  in  putting  it  together  it  will  not  solve  the 
problem.  In  fact  its  influence  will  hardly  be  noticeable. 
The  reason  for  this  statement  will  appear  in  the  chapter 
on  "Foreign  Exchange." 

All  these  various  acts  and  the  Federal  Reserve  Act 
itself,  as  it  stands  today,  are  but  patches  on  a  financial 
system  that  can  be  made  practically  perfect  by  a  small 
dose  of  American  common  sense  properly  administered. 

What  is  necessary  and  how  to  do  it  in  order  to  set 
the  wheels  of  industry  humming  and  restore  prosperity 
will  be  clearly  shown  as  we  progress. 

The  case  of  automobile  dealers  at  the  present  time  is 
another  example  that  is  to  the  point.  The  Federal  Re- 
serve bank  will  rediscount  no  "automobile  paper"  except 
that  based  on  machines  used  for  commercial  purposes. 
All  other  dealers  are,  as  a  result,  unable  to  obtain  the 
facilities  to  carry  on  business  for  the  banks  will  not  dis- 
count paper  secured  by  their  stock-in-trade  of  automo- 
biles. 

Here  is  another  instance  in  which  our  present  banking 
system  is  not  only  inadequate  but  works  a  very  great 
hardship.     It  is  another  instance  in  which  the  banks  fail 


6  THE  STRANGLE  HOLD 

to  supply  all  the  needs  of  the  community  which  they 
should  satisfy.  Automobiles  are  today  a  recognized  need 
of  the  community.  The  automobile  dealer  is,  therefore, 
a  necessary  factor  in  our  commercial  organization.  But 
these  dealers  cannot  obtain  the  commercial  facilities 
they  need  in  order  to  carry  on  business. 

The  present  selling  plan  for  automobiles,  where  the 
dealer  takes  a  cash  payment  of  about  a  third  of  the  price 
and  the  balance  in  notes  running  from  ten  to  twelve 
months,  was  built  up  through  the  cooperation  of  the 
banks.  The  banks  were  glad  to  discount  this  paper 
especially  after  the  automobile  dealers  had  gotten  in- 
surance companies  to  insure  the  automobile  against  theft, 
fire  and  embezzlement. 

It  took  several  years  and  much  thought  and  energy 
on  the  part  of  the  automobile  trade  to  build  up  this 
selling  plan  and  to  educate  the  public  to  use  it.  All  the 
dealers'  calculations  were  based  on  this  selling  plan  and 
the  factory  depended  upon  it  for  its  funds. 

Unless  the  banker  continues  to  discount  this  paper 
the  dealer  cannot  pay  the  manufacturer  for  his  goods 
except  he  cashes  his  paper  by  paying  excessive  discount 
to  private  parties,  and  the  manufacturer  is  not  in  a 
position  to  wait  for  payment  vmtil  the  cars  are  paid  for 
in  full  by  the  purchaser. 

Here  we  have  the  proper  scope  for  the  functions  of 
the  bank — to  lend  money  upon  good  security.  The 
security  offered  is  the  stock-in-trade  itself — the  automo- 
biles. Such  security  has  proved  to  be  good  but  the  bank 
will  not  or  cannot  carry  the  paper  and  the  comxmmity 
puffers. 


THE  BAR  TO  PROSPERITY  7 

No  one,  calling  to  mind  our  present  industrial  tur- 
moil, business  uncertainty,  and  social  unrest,  will  be  dis- 
posed to  doubt  that  a  wrong  exists.  It  also  seems  quite 
clear  that  this  wrong  is  intimately  concerned  with  our 
banking  system.  It  cannot  be  denied  that  there  is  a 
flaw  in  a  system  which  refuses  the  farmer  a  loan  be- 
cause his  security  is  one  of  property.  It  is  also  clear 
that  a  system  which  disrupts  the  second  largest  business 
in  the  country — the  automobile  trade — ^without  warning 
and  with  very  harmful  results  is  dangerous  and  ineffi- 
cient. The  present  state  of  our  foreign  trade  and  ship- 
ping business  is  another  glaring  example.  But  before 
proceeding  further  in  our  search  of  the  flaw,  let  us  con- 
sider the  commonly  accepted  explanation  of  present  bad 
conditions. 

As  usual,  laborers  are  blaming  the  capitalists,  and 
capitalists  the  laborers,  although  neither  party  is  very 
sure  of  what  the  other  is,  nor  why  it  is  responsible  for 
present  bad  conditions. 

The  manufacturers  and  jobbers  are  complaining  of  a 
"Buyers  Strike,"  the  financiers  say  the  trouble  is  due 
to  "Frozen  Credits,"  the  economists  tell  us  "Liquidation" 
must  take  place  before  prosperity  returns,  and  the  press 
says  we  must  get  back  to  "Normalcy." 

These  high  sounding  phrases,  at  present  popular  with 
financial  writers,  will  be  explained  later  but  first  let  us 
examine  what  is,  or  rather  was,  given  as  the  most  popular 
explanation  for  bad  conditions. 

For  a  year  or  so  after  the  close  of  the  war  the  com- 
mon disturber  of  the  peace  and  happiness  of  the  country 


8  THE  STRANGLE  HOLD 

was  said  to  be  the  "High  Cost  of  Living."  Everything 
that  was  wrong  was  due  to  the  "H.  C.  L." 

This  "High  Cost  of  Living"  is  another  catchy  phrase. 
It  seems  to  invite  and  hold  hostility,  like  the  word 
"witch,"  or  "hobgoblin,"  and  like  those  words,  it  has  no 
exact  meaning.  Another  good  thing  about  all  such  terms 
is  that  they  do  not  accuse  anyone  in  particular  of 
wrong-doing,  so  they  are  convenient  for  our  statesmen 
and  other  economic  doctors  to  use  in  describing  a  patho- 
logic condition  of  the  social  organism. 

In  the  recent  campaign  against  the  "High  Cost  of 
Living,"  it  became  generally  accepted  that  the  H.  C.  L. 
was  the  result  of  a  large  group  of  men  doing  business 
at  a  profit,  and  who  consequently  were  kno^vn  as  "profi- 
teers." This  group  was  so  large  and  scattered  that  it 
took  in  a  good  percentage  of  the  people  of  the  L'nited 
States.  But  the  politicians  had  to  make  a  pretence  of 
hurting  some  of  the  big  fellows,  in  order  to  appease  the 
public;  so  five  packers  of  Chicago  were  chosen,  by  com- 
mon consent,  to  be  the  object  of  Congressional  investiga- 
tion. While  this  action  may  not  seem  entirely  fair  to 
the  packers,  no  sympathy  need  be  wasted  on  them,  for 
they  were  not  greatly  hurt. 

In  spite  of  all  this  campaigning  there  was  no  break 
in  the  price  of  commodities.  The  High  Cost  of  Living 
remained  until  the  banks  decided  it  was  time  to  "de- 
flate," that  is,  shut  the  door.  This  action  brought  down 
some  prices  in  a  hurry  and  is  now  bringing  down  wages 
so  it  is  not  giving  general  satisfaction.  It  has  also  caused 
business  stagnation  and  unemployment  with  a  decrease 
in  bank  clearings  and  an  increase  in  business  failures. 


THE  BAR  TO  PROSPERITY  9 

so  the  lowering  of  prices  has  aggravated  rather  than 
solved  the  problem. 

Although  no  one  has  a  very  clear  idea  of  what  the 
term  "High  Cost  of  Living"  means,  everyone  will  say 
that  it  has  something  to  do  with  high  prices.  The  re- 
tailer says  he  has  to  charge  high  prices  because  of  high 
expenses,  and  because  of  high  prices  charged  him  by  the 
manufacturer.  The  manufacturer  says  he  has  to  charge 
high  wholesale  prices  because  of  the  high  wages  he  has 
to  pay  and  because  of  the  high  cost  of  raw  material  and 
everything  else  he  has  to  buy. 

In  general,  then,  the  social  and  commercial  disturb- 
ance and  unrest  is  blamed  upon  high  prices,  as  being 
the  cause  of  the  high  cost  of  living. 

During  President  Cleveland's  second  administration, 
back  in  the  '90s,  there  was  no  complaint  about  high 
prices.  Com  was  so  cheap  it  was  being  used  as  fuel. 
Eggs  could  be  bought  for  ten  cents  per  dozen.  Clothing 
and  shoes  were  about  one  half  of  their  present  price. 
However,  there  was  great  business  depression  and  a 
similar  amount  and  degree  of  social  unrest.  At  that 
time  conditions  were  the  reverse  of  what  they  are  now  or 
were  recently.  When  the  H.  C.  L.  was  the  topic  of  the 
day  wages  were  high,  there  was  a  job  for  everybody,  who 
wanted  one,  business  was  good  and  high  prices  prevailed. 
During  Cleveland's  time  when  prices  were  low,  we  had 
starvation  wages,  unemployment,  business  failures,  soup 
kitchens,  Coxey  armies  and  panic.  And  as  a  result, 
what  we  recently  blamed  upon  the  High  Cost  of  Living, 
was  then  blamed  upon  the  Low  Cost  of  Living. 

Just  as  conditions  during  the  '90s  were  the  reverse  of 


10  THE  STRANGLE  HOLD 

what  they  were  when  the  H.  C.  L.  was  the  great  bugaboo^, 
so  the  remedies  proposed  then  were  the  reverse  of  those 
proposed  to  overcome  the  H.  C.  L. 

It  will  be  remembered  that  !Mr.  Bryan  made  a  presi- 
dential campaign  in  1896  on  a  platform  that  declared 
for  the  free  and  unlimited  coinage  of  silver  at  the  ratio 
of  sixteen  to  one.  The  argument  was  that  the  price  of 
wheat  followed  the  price  of  silver,  and  as  the  price  of 
wheat  was  the  barometer  of  all  prices  the  way  to  raise 
prices  was  to  restore  the  price  of  silver  to  $1.29  per 
ounce.  Raising  the  price  of  silver  would  raise  the  price 
of  wheat  correspondingly,  and  all  prices  would  follow 
the  upward  trend. 

In  other  words,  prices  then  were  low,  and  the  remedy 
proposed  was  one  designed  to  raise  prices.  When  prices 
were  high,  it  was  almost  universally  believed  that  the 
only  efficacious  remedy  was  to  lower  prices. 

The  theory  when  Bryan  ran  for  president  the  first 
time  was  that  a  low  price  for  commodities  caused  low 
wages  and  business  stagnation,  which  was  an  economic 
calamity  to  be  avoided,  and  the  remedy  suggested  was 
to  raise  prices. 

The  theory  during  the  extreme  high  price  period 
seemed  to  be  that  high  prices,  with  their  accompanying 
effects  of  good  wages,  plenty  of  work,  profitable  business 
and  a  high  standard  of  living  produced  a  bad  economic 
condition  which  should  have  been  remedied  by  lowering 
prices  through  government  regulation  or  by  deflation. 

If  the  H.  C.  L.  were  the  cause  of  industrial  turmoil 
our  condition  now  should  be  most  serene  for  many  prices 
have  recently  taken  a  violent  fall.     This  fall  in  prices. 


THE  BAR  TO  PROSPERITY  11 

however,  does  not  seem  to  be  giving  satisfaction.  The 
agricultural  interests  are  making  continuous  efforts  to 
secure  credit  for  the  purpose  of  holding  their  crops  for 
higher  prices.  They  have  pleaded  with  the  banks,  the 
Federal  Reserve  Board  and  the  President  for  help. 
They  asked  that  the  war  tinje  Government  financing  cor- 
poration be  reinstated  to  save  them  from  financial  ruin. 
They  are  now  forming  marketing  associations  and  the 
bankers  are  trying  to  form  foreign  trade  corporations 
under  the  "Edge  Act"  with  the  avowed  purpose  of  rais- 
ing prices.  The  situation  makes  the  argument  that  our 
economic  condition  is  due  to  prices  ridiculous. 

It  is  illogical  to  blame  at  one  time  the  High  Cost,  and 
at  another  the  Low  Cost  of  Living,  for  the  same  results, 
and  to  suggest  identically  opposite  remedies. 

And,  as  a  matter  of  fact,  if  we  compare  our  conditions 
under  high  prices,  with  those  that  existed  a  few  years 
back  under  low  prices,  we  are  forced  to  admit  that  the 
majority  were  really  better  off  under  high  prices  than 
when  prices  were  low.  Never  was  there  a  time  when 
the  majority  of  the  people  enjoyed  so  many  comforts 
and  luxuries  with  so  little  expenditure  of  time  and 
effort  as  they  did  when  prices  were  the  highest.  Things 
which  the  most  humble  citizen  of  today  regards  as  neces- 
sities were  but  a  few  years  ago  regarded  either  as  the 
greatest  of  luxuries,  or  else  were  unobtainable.  Present 
living  and  working  conditions  are  so  improved  for  the 
majority  of  the  people  that  it  is  hard  to  realize  that  the 
old  adage:  "Man  works  from  sun  to  sun,  but  a  woman's 
work  is  never  done"  expressed  the  literal  truth  as  to 
conditions  existing  only  a  short  time  ago. 


12  THE  STRANGLE  HOLD 

On  the  other  hand,  if  we  compare  the  prices  current 
today  with  those  current  a  few  years  ago,  we  must  admit 
that  they  are  much  higher  now.  And  if  we  compare 
them  with  those  of  some  time  ago,  we  shall  see  that  they 
have  gone  up  tremendously. 

This  condition  and  the  fact  that  both  in  the  case  of 
the  Low  Cost  of  Living  and  of  the  High  Cost  of  Living 
the  remedies  proposed  were  concerned  with  alterations 
in  prices,  all  point  to  the  same  solution.  The  trouble 
seems  to  be  in  the  dollars  themselves,  and  not  in  the 
living.  If  prices  remained  at  a  constant  level,  whether 
that  level  were  low  or  high,  wages  and  prices  would  ad- 
just themselves.  For  prices  are  nothing  more  than  the 
exchange  ratios  of  all  commodities  and  services,  ex- 
pressed in  terms  of  money.  Any  disturbance  of  these 
ratios  leads  to  a  need  for  readjustment,  and  it  is  the 
friction  incident  to  this  readjustment  that  is  the  real 
cause  of  our  troubles. 

Let  us  see  how  this  works  out  in  regard  to  conditions 
we   have  experienced. 

The  war  caused  a  pressing  demand  for  large  quanti- 
ties of  various  commodities  at  a  time  when  a  great  num- 
ber of  men  were  withdrawn  from  productive  pursuits. 
The  demand  for  labor  increased  at  a  time  Avhen  the 
supply  of  labor  had  been  decreased.  This  condition 
caused  wages  to  go  up.  High  wages  in  "war-industries," 
drew  labor  from  other  industries,  thus  lessening  the 
supply,  and  tending  to  raise  wages  in  these  industries 
too.  As  a  result,  there  was  a  twofold  tendency  to 
raise  prices:  in  the  first  place,  higher  prices  had  to  be 
charged  in  order  to  make  it  possible  to  pay  the  increased 


THE  BAR  TO  PROSPERITY  13t 

wages;  and  in  the  second  place,  the  workers  were  able 
to  buy  more  with  their  increased  wages — their  effective 
demand  increased,  resulting  in  better  business  and  higher 
prices. 

At  the  same  time  large  quantities  of  credit  were  issued 
in  this  and  in  other  countries  in  order  to  pay  for  the 
goods  made  necessary  by  the  war.  The  effect  of  these 
new  issues  of  credit  was  to  "inflate"  the  medium  of  ex- 
change— there  were  now  more  dollars  in  circulation;  in 
consequence  of  which  the  "price  of  the  dollar,"  that  is,^ 
the  amount  of  other  commodities  one  dollar  would  ex- 
change for,  decreased.     Prices  rose. 

The  war,  therefore,  had  a  twofold  effect  in  raising 
prices,  and  the  result  was  consequently  doubly  great. 
As  a  result,  there  was  all  the  more  friction  in  the  at- 
tempted readjustment,  and  it  is  the  lack  of  adjustment; 
that  is  the  cause  of  our  present  troubles. 

If  every  exchangeable  ratio  moved  simultaneously  and 
to  an  equal  extent — that  is,  if  prices,  wages,  interest,, 
profits,  and  rents  rose  and  fell  equally,  there  would  be 
no  such  trouble.  But  they  do  not;  nor  is  the  readjust- 
ment equal  in  all  branches  of  our  social  organization. 
Those  who  produced  the  commodities,  and  those  wha 
rendered  the  services  which  were  not  directly  affected 
by  the  demands  of  war — the  public  service  corporations, 
landlords,  preachers,  teachers,  actors,  and  government 
employees — all  were  losers  by  the  rise  in  prices  at  first 
because  the  readjustment  of  income  to  expenses  was 
slower  in  their  cases. 

Such  are  the  troubles  of  inflation  of  the  currency, 
the  troubles  of  the  High  Cost  of  Living.     The  troublesi 


14  THE  STRANGLE  HOLD 

of  the  Low  Cost  of  Living  are  concerned  with  contrac- 
tion of  the  currency.  Both  inflation  and  contraction 
change  the  purchasing  power  of  money  and  therefore 
effect  prices.  More  definitely,  they  are  concerned  with 
the  varying  price  of  the  dollar — or  the  changing  value 
of  the  dollar.  The  only  way  to  remove  these  troubles 
is  to  make  the  dollar  a  constant  measurement  of  value — 
to  have  a  medium  of  exchange  that  can  neither  be  in- 
flated nor  contracted. 

An  illustration  will  make  this  clear.  Suppose  the 
length  of  a  foot-rule  were  to  vary  with  the  supply  of  and 
demand  for  wood.  What  havoc  would  be  caused  in  all 
our  dealings !  Luckily  a  foot  is  always  twelve  inches, 
whatever  the  price  of  wood,  for  it  is  the  same  whether 
measured  by  a  foot-rule  of  wood,  steel,  or  tape.  Simi- 
larly if  a  dollar  were  always  the  same,  whether  mea- 
sured in  gold,  silver,  wheat,  or  any  other  commodity, 
the  greatest  of  our  social  evils  would  disappear. 

The  problem,  then,  is  not  to  meddle  with  the  High 
Cost  of  Living,  nor  with  the  Low  Cost  of  Living,  but  to 
remove  industrial  and  social  friction  by  removing  their 
cause.  This  cause  is  the  varying  price  of  the  dollar, 
and  is  due  to  a  defect  in  our  monetary  system. 

The  purpose  of  this  somewhat  extensive  digression, 
now  becomes  clear.  In  the  earlier  pages  of  this  chapter 
it  was  demorstrated  that  the  fullest  development  of 
prosperity  was  prevented  by  some  flaw  in  our  banking 
system.  In  the  latter  half  it  has  been  shown  that  the 
great  social  and  industrial  vmrest  that  is  continually 
making  itself  felt  is  due  to  a  flaw  in  our  monetary  sys- 
tem.     It  follows,  then,  that  all  these  troubles  can  be 


THE  BAR  TO  PROSPERITY  15 

removed  by  correcting  these  flaws.  The  purpose  of  this 
book  is  to  show  definitely  where  these  flaws  are,  and  to 
suggest  a  practical  way  of  removing  them. 

It  is  clear  that  this  task  would  be  simiDlified  if  it 
could  be  shown  that  both  these  flaws  are  really  one: 
that  they  are  results  from  the  same  causes,  and  can  be 
corrected  by  the  same  remedy. 

As  a  matter  of  fact,  this  is  the  case.  It  is  a  common 
belief  that  banks  are  largely,  if  not  altogether,  con- 
cerned with  money.  This  idea  may  require  revision,  but 
if  it  can  be  proved  that  the  banks  are  in  entire  control 
of  the  medium  of  exchange,  then  it  will  follow  that 
the  flaw  in  our  monetary  system  is  a  part  of  the  flaw 
in  our  banking  sj'stem,  and  that  to  correct  the  latter 
will  correct  the  former. 

Before  showing  where  the  flaw  is,  therefore,  we  will 
see  how  both  faults  are  inextricably  bound  up  with  each 
other,  so  that  both  problems  are  really  one. 

The  first  step  then  is  to  show  that  the  banks  have  sole 
control  over  our  medium  of  exchange — and  this  will  be 
the  purpose  of  the  next  chapter. 


CHAPTER  II 
EVOLUTION  OF  OUR  EXCHANGE  SYSTEM 

BEFORE  we  go  further  in  our  search  for  a  solu- 
tion of  our  problem  let  us  by  a  glance  at  world 
conditions  today  note  the  need  for  a  solution. 

In  Europe  we  find  unemployment  and  want  in  prac- 
tically every  country.  In  Asia  want  extends  to  starva- 
tion for  thousands,  even  millions  of  people. 

In  the  United  States  warehouses  are  filled  with  wheat, 
other  food  products,  cotton,  wool,  copper  and  practically 
everything  the  rest  of  the  world  wants.  And  yet 
business  lags  and  labor  is  unemployed. 

Consider  these  facts  and  ask  yourself:  "What  is  the 
trouble?" 

Europe  and  Asia  are  suffering  from  a  lack  of  supply 
while  our  business  slump  is  due  to  a  lack  of  demand. 
There  is  plenty  of  desire  for  what  we  have  to  sell  but 
not  much  demand. 

The  rest  of  the  world  want  to  buy  our  goods  and  we 
want  to  sell  them.  Our  harbors  are  filled  with  ships 
falling  to  decay  for  want  of  a  cargo.  Our  railroads  are 
seeking  to  cut  wages  because  of  lack  of  business  due  to 
a  falling  off  in  freight. 

With  our  warehouses  full,  with  plenty  of  transporta- 
tion facilities,  with  people  all  over  the  world  crying, 
even  dying,  for  what  we  have  for  sale,  why  do  we  not 
sell,  revive  business  and  bring  back  prosperity  }    WHY  ? 

16 


EVOLUTION  OF  EXCHANGE  SYSTEM       17 

That  is  the  question  we  must  answer.  And  it  must  b« 
a  practical  common  sense  answer  that  can  be  put  into 
effect,  so  as  to  overcome  these  conditions  and  bring- 
peace  and  prosperity  to  a  troubled  world. 

The  trouble  is  plainly  in  our  exchange  system.  It  ha§ 
broken  doAvn.  The  means  by  which  we  carry  on  busi-. 
ness,  our  financial  system,  is  at  fault.  It  is  inadequate 
to  facilitate  the  exchange  which  makes  business  possible 
so  the  whole  world  suffers. 

A  few  cases  wherein  our  present  system  fails  to  sup- 
ply the  needs  of  business  such  as  that  of  the  farmer  and 
others  have  been  pointed  out.  In  this  and  the  following 
three  chapters  the  reasons  for  this  failure  will  be  shown 
and  in  chapters  VII  and  VIII  a  simple  way  of  over- 
coming the  trouble  will  be  given. 

Now  that  we  recognize  that  our  prosperity  and  the 
reconstruction  of  the  world  depend  on  a  correct  solution 
of  this  exchange  problem  we  can  proceed. 

As  was  stated  in  the  last  chapter,  the  next  step  in 
solving  the  problem  before  us  is  to  show  that  all  the 
evils  resulting  from  the  varying  price  of  the  dollar, 
and  all  the  hindrances  to  progress  resulting  from  lack 
of  credit  facilities  are  due  to  some  defect  in  our  banking 
system.  Also  that  both  these  defects  owe  their  origin 
to  one  and  the  same  cause. 

In  the  one  case  we  saw  that  the  evils  were  due  to  a 
defect  in  the  monetary  system,  and  in  the  other  case  to 
a  defect  in  the  banking  system.  If  it  can  be  shown 
that  our  circulating  medium — our  money — is  entirely  in 
the  control  of  our  bankers,  it  will  follow  that  the  evil" 
are  all  due  to  the  same  cause. 


18  THE  STRANGLE  HOLD 

In  order  to  do  this  we  must  have  a  clear  idea  of  what 
our  monetary  system  is,  so  it  will  be  necessary  first  to 
touch  upon  the  more  important  phases  in  the  history  of 
the  development  of  money. 

Primitive  exchange,  it  is  easy  to  see,  proceeded  by 
means  of  barter.  One  man  would  exchange  that  which 
he  had  directly  for  that  which  he  wanted.  But  this 
method  had  great  disadvantages.  For  instance,  one 
might  find  that  the  man  who  owned  that  which  he  de- 
sired did  not  wish  to  exchange  it  for  that  which  he  had 
to  offer.  Suppose  one  man  had  a  bear-skin,  which  he 
wished  to  exchange  for  food.  Another  man  might  have 
some  surplus  food,  but  he  might  not  want  a  bear-skin. 

And  even  if  he  did  desire  a  bear-skin,  he  might  not 
have  enough  food  to  exchange  for  one.  Or  the  man 
with  the  bear-skin  might  desire  only  half  a  bear-skin's 
worth  of  food,  desiring  in  addition  something  else  which 
the  other  man  did  not  possess.  Such  an  example,  crude 
as  it  is,  serves  to  indicate  some  of  the  great  difficulties 
of  barter. 

Sometimes,  however,  a  man  would  be  willing  to  take 
in  exchange  for  something  he  had,  some  object  which 
he  did  not  want  himself,  but  which  he  could  be  sure 
some  one  else  would  want.  This  was  the  first  step  taken 
in  the  development  of  a  medium  of  exchange.  For 
instance,  the  man  would  be  willing  to  take  the  bear-skin 
in  exchange  for  his  food,  if  he  could  be  practically  cer- 
tain that  some  one  else  would  want  such  a  skin,  and 
would  give  in  exchange  for  it  something  which  its  pos- 
sessor wanted  more  than  he  wanted  the  skin. 

Naturally  those  things  which  were  most  in  demand 


EVOLUTION  OF  EXCHANGE  SYSTEM       19 

came  to  be  accepted  most  readily.  Shells,  teeth,  and 
other  articles  prized  for  ornamental  purposes  would 
pass  from  hand  to  hand  in  exchange  for  things  that  were 
desired  more  urgently.  Even  more  perishable  commodi- 
ties have  been  used  in  this  way,  such  as  dried  fish  and 
tobacco — but  obviously  these  could  not  remain  in  cir- 
culation very  long.  Consequently  the  more  lasting  ar- 
ticles took  the  place  of  the  more  perishable  as  a  medium 
of  exchange. 

From  this  situation  it  is  easy  to  understand  how  the 
metals,  on  account  of  their  durability,  and  the  more 
precious  metals  especially,  on  account  of  the  convenience 
in  carrying  them,  came  to  be  used  almost  exclusively  in 
acts  of  exchange.  Gold  and  silver  came  to  be  used 
universally  to  carry  on  trade.  A  subsequent  develop- 
ment was  the  process  of  coining,  by  which  certain 
weights  of  these  metals  were  struck  with  a  stamp  to  sig- 
nify their  weight  and  fineness. 

Since  everybody  was  willing  to  accept  gold  or  silver 
in  return  for  goods,  gold  and  silver  became  the  most 
convenient  "storehouses  of  value."  Whoever  had  more 
goods  than  he  needed,  would  exchange  the  surplus  for 
gold  or  silver  and  the  metal  being  non-perishable  and 
always  acceptable  could  be  put  by  against  a  time  when 
he  would  need  other  goods  for  which  he  could  exchange 
the  metals.  And  in  order  to  guard  against  theft,  he 
would  look  around  for  the  safest  place  to  keep  them. 

Goldsmiths,  since  they  worked  in  the  precious  metals, 
always  had  to  have  a  supply  of  gold  and  silver  on  hand, 
so  they  had  strong-boxes  in  which  to  store  them  safely. 
It  became  a  custom  for  them  to  oblige  their  patrons  by 


'20  THE  STRANGLE  HOLD 

also  storing  the  gold  of  these  patrons.  In  return  for 
the  metal  deposited  with  them  they  would  give  a  receipt. 

Since  gold  could  be  had  to  the  amount  called  for  upon 
presentation  of  these  receipts,  people  came  to  look  upon 
them  as  being  as  valuable  as  the  metal  itself.  The 
goldsmith  was  trustee  for  the  gold  which  gave  the  re- 
ceipts their  value,  and  so  peojDle  began  to  transfer  them 
or  came  to  use  these  receipts  as  money  instead  of  the 
metal.  Since  gold  could  be  had  in  exchange  for  them  for 
the  asking,  people  were  ready  to  accept  these  receipts 
the  same  as  gold  in  return  for  their  wares.  They  were 
even  more  acceptable,  sometimes,  on  account  of  the 
greater  ease  of  handling,  consequently  the  gold  itself 
was  seldom  demanded. 

Meanwhile  the  goldsmith,  finding  that  no  one  came 
to  ask  for  the  gold  which  had  been  deposited,  or  at  any 
rate,  that  very  few  did,  began  to  issue  receipts  against 
which  no  gold  had  been  deposited.  People  would  ac- 
cept these  receipts  as  willingly  as  those  for  which  gold 
had  been  deposited,  for  they  did  not  know  the  difference. 
And  so  long  as  the  goldsmith  could  pay  metal  in  ex- 
change for  all  receipts  that  might  be  tendered,  so  long 
it  did  not  matter  whether  there  was  a  full  amount  of 
gold  behind  the  notes  or  not.  The  only  thing  the  gold- 
smith had  to  do  in  order  to  keep  his  receipts  passing  as 
money  was  to  keep  people  thinking  that  there  was  gold 
behind  them,  and  this  he  could  do  so  long  as  he  was 
able  to  pay  gold  on  demand. 

The  very  same  principle  is  behind  all  our  issues  of 
paper  money  today.  As  long  as  people  are  confident 
that  they  can  get  value  in  return  for  paper  money,  they 


EVOLUTION  OF  EXCHANGE  SYSTEM       21 

will  accept  the  paper  as  readily  as  gold,  and  in  some 
cases  even  more  readily.  And  a  similar  principle  lies 
at  the  bottom  of  our  bank  check  system.  If  only  people 
are  confident  that  they  will  be  able  to  get  money  in 
payment  of  the  check,  they  will  be  willing  to  accept  the 
check  in  return  for  their  wares. 

Most  people  today  think  that  business  is  carried  on 
by  means  of  money.  Some  there  are,  indeed,  who 
think  that  it  is  really  carried  on  by  means  of  gold, 
since  the  paper  money  that  is  used  calls  for  gold,  and 
gold  can  sometimes  be  had  for  it  on  demand. 

But  as  a  matter  of  fact  this  is  not  the  case.  Bank 
Credit  is  almost  entirely  our  medium  of  exchange.  To 
be  more  exact,  the  report  of  the  Comptroller  of  the  Cur- 
rency of  the  United  States  for  1919  shows  that  we  do 
about  95%  of  all  our  business  by  the  use  of  checks. 
The  report  says  (Page  36,  Vol.  2),  that  our  medium 
of  exchange  is  made  up  as  follows: 

Gold    60% 

Silver     40% 

Paper    (all   paper   money   of   govern- 
ment issue) 4.90% 

Bank    Credit    (bank    deposits    trans- 
ferred  by   check) 94,10% 


100.00% 


This  table  was  made  up  in  1909  before  the  Federal 
Reserve  System  was  established.  Since  its  establish- 
ment our  paper  money  consists  almost  entirely  of  federal 
reserve  notes  and  national  bank  notes,  both  of  which  are 


22  THE  STRANGLE  HOLD 

in  reality  bank  credit,  so  our  medium  of  exchange  now  is 
more  than  99%  bank  credit. 

From  the  foregoing  it  is  evident  that  BANK  CREDIT, 
or  credit  on  the  bank's  books,  is  practically  our  sole 
medium  of  exchange.  Government  money  consists  of 
change  only  and  is  used  for  the  lesser  transactions  where 
it  would  be  inconvenient  to  draw  a  check,  as  for  instance, 
to  pay  for  a  lunch  or  car  fare. 

Since  bank  credit  then  is  the  medium  by  which  trade 
is  conducted  and  which  moves  and  controls  all  our  indus- 
tries and  through  them  regulates  our  lives,  it  should  not 
only  be  interesting  and  profitable,  but  it  is  essentially 
necessary,  that  we  should  understand  clearly  what  bank 
credit  is,  and  how  it  comes  into  existence.  To  do  this 
let  us  follow  the  operations  of  a  bank. 

After  obtaining  its  charter,  our  bank  begins  business 
with,  we  will  say,  a  paid  up  capital  of  $10,000.  The 
people  of  the  community  then  deposit  gold  or  other  cash 
to  the  am.ount  of  $50,000.  This  fifty  thousand  dollars 
becomes  the  property  of  the  bank,  subject  to  the  right 
of  withdrawal  by  the  depositor,  and  the  bank  statement 
appears  as  follows: 

RESOURCES  LIABILITIES 

Cash $60,000  Capital  ..  .$10,000 

Deposits  .  .    50,000 


$60,000  $60,000 

The  banker  knows  from  experience  that  some  of  his 
customers  will  bring  in,  on  an  average,  as  much  money 
as  others  draw  out,  so  the  sixty  thousand  dollars  in  cash 


EVOLUTIOX  OF  EXCHANGE  SYSTEM      23 

is  usually  on  hand  all  the  time.  If  his  customers  would 
continue  to  draw  out  money  he  would  have  to  close  his 
doors.  We  will  therefore  assume  that  the  $60,000  re- 
mains constant.  From  this  fact  the  banker  naturally 
infers,  as  did  his  predecessor  the  goldsmith,  that  if  the 
bank's  ten  thousand  dollars  are  accepted  by  the  public 
as  a  guarantee  for  fifty  thousand  dollars,  then  the  whole 
sixty  thousand  dollars  in  cash  will  serve  as  a  guarantee 
for  a  much  larger  sum.  So  the  bank  begins  to  "lend 
money." 

In  this  transaction  the  regular  procedure  is  as  fol- 
lows. The  would-be  borrower  makes  out  an  application 
for  a  loan  in  which  he  states  the  amount  desired  and 
the  time  for  which  it  is  wanted.  He  enumerates  the 
securities  he  proposes  to  furnish  with  his  note  and 
states  the  use  he  intends  to  make  of  the  money.  The 
banker  hands  this  list  of  securities  to  the  bank  appraiser 
for  valuation.  Accompanied  by  the  appraiser's  report, 
the  application  then  goes  before  the  finance  or  loan 
committee  of  the  bank  for  action.  This  committee  is 
usually  composed  of  five  or  more  members  of  the  board 
of  directors,  who  meet  at  least  once  a  week  to  pass  on 
applications  for  loans,  especially  on  those  of  new  bor- 
rowers. This  committee  may  accept  or  reject  the  loan 
applied  for,  or  it  may  allow  only  a  portion  of  it.  Let 
us  say  that  the  report  of  the  bank  appraiser  is  satis- 
factory and  the  action  of  the  loan  committee  favorable, 
so  that  a  loan  of  one  thousand  dollars  at  six  per  cent 
for  ninety  days  is  made  to  the  applicant. 

The  loan  is  consummated  by  the  bank  taking  the  note 
of   the  borrower   and   his    security   and   -writing   on   the 


24  THE  STRANGLE  HOLD 

credit  side  of  his  pass  book,  "$985.00,"  representing 
one  thousand  dollars  discounted  at  six  per  cent  for 
ninety  days.  On  the  debit  side  of  the  bank's  books 
appears  the  entry:  "Loans  and  Discounts,  $1,000;"  on 
the  credit  side  "Deposit,  $985.00"  and  "Discoimt, 
$15.00."     The  bank  statement  now  reads: 

RESOURCES  LIABILITIES 

Cash $60,000  Capital $10,000 

Loans  and  Deposits 50,985 

Discounts...      1,000         Discounter 

Profit    15 


$61,000  $61,000 

Here  it  is  seen  that  the  loan  appears  as  an  asset  on 
one  side  of  the  ledger  under  the  head  of  "Loans  and 
Discounts"  (and  properly  so,  because  the  bank  has  the 
borrower's  note  and  security),  and  on  the  other  side  of 
the  account  it  appears  as  a  liability,  being  added  in  with 
the  cash  deposits,  just  as  if  it  were  $985.00  in  gold  that 
the  borrower  had  deposited.  The  other  fifteen  dollars 
discount  or  interest  is  profit  to  the  bank  on  the  trans- 
action. An  analysis  of  this  transaction  shows  that  the 
banker  has  done  exactly  what  the  goldsmith  used  to  do. 
He  has  given  the  borrower  a  receipt  for  a  deposit  of 
money  though  no  money  has  been  deposited. 

The  fiction  is  that  the  banker  has  handed  the  bor- 
rower $985.00  in  money  for  his  note,  payable  in  ninety 
days,  and  the  borrower  has  gone  to  the  receiving  teller's 
"window  and  deposited  the  money.  The  result  in  the 
bank's    records    and    in    the    borrower's    pa^s    book    is 


EVOLUTION  OF  EXCHANGE  SYSTEM      25 

exactly  the  same  as  if  that  had  actually  been.  done. 
Even  if  the  borrower  had  taken  the  cash  out  of  the 
bank  and  deposited  it  in  some  other  bank,  or  after 
receiving  credit  for  the  deposit  had  withdrawn  it  and 
spent  the  money  in  the  community,  it  or  its  equivalent 
would  soon  return  to  the  first  bank,  and  the  bank's  cash 
and  deposits  would  therefore  remain  about  the  same. 

Let  us  suppose  the  borrower  in  this  case  draws  a 
check  for  the  full  amount  of  the  loan  in  favor  of  some 
creditor  or  to  pay  for  goods.  The  loan  is  still  a  deposit 
although  it  is  no  longer  to  the  borrower's  credit.  The 
deposit  is  transferred  to  the  credit  of  the  person  receiv- 
ing the  check.  If  that  person  keeps  his  account  in  the 
same  bank  the  transfer  consists  merely  of  charging  the 
borrower's  account  and  crediting  the  new  owners  and 
giving  credit  in  the  new  owner's  pass  book.  But  if  the 
new  owner  of  the  credit  keeps  his  accoimt  in  another 
bank  he  deposits  the  check  there  and  receives  credit  for 
a  deposit.  The  credit  is  then  transferred  from  the 
lending  bank  to  the  second  bank. 

The  transfers  between  banks  made  necessary  by  such 
operations  are  made  by  what  is  called  a  clearing.  That 
is,  the  orders  or  checks  against  bank  No.  1  presented  by 
tank  No.  2  are  cancelled  against  the  orders  or  the  checks 
on  bank  No.  2  in  favor  of  bank  No.  1  and  only  the  bal- 
ance left  after  the  cancellation  is  complete  is  paid  in 
money.  For  instance  if  the  checks  on  bank  No.  1  pre- 
sented by  bank  No.  2  amount  to,  we  will  say,  $916.50 
and  the  checks  on  bank  No.  2  presented  by  bank  No.  1 
amount  to  $1,075.50  then  the  clearing  or  cancellation 
would  show  a  balance  of  $1,075.50  minus  $916.50  or 


26  THE  STRANGLE  HOLD 

$159.00  due  from  bank  No.  2  to  bank  No.  1  which  is  pay- 
able in  money. 

The  more  nearly  all  the  business  of  the  community  is 
carried  on  by  checks  and  drafts  the  less  money  is 
required  to  pay  balances.  If  all  the  business  were  car- 
ried on  by  checks  all  transactions  would  cancel  and 
there  would  be  no  balances,  just  as  a  set  of  double 
entry  books  must  balance  when  they  are  correct.  It 
would  be  simply  a  transfer  of  credits  from  one  account 
to  another  and  all  the  banks  would  constitute  just  one 
big  bank. 

The  point  to  be  particularly  noted  is  that  while  the 
loan  we  are  examining  is  stated  in  terms  of  money  no 
money  is  used  in  the  transaction.  It  is  credit  and  while 
it  may  sometimes  be  turned  into  money,  or  what  we  call 
money,  at  least  95%  of  it  never  is,  but  is  transferred 
from  one  to  another  by  means  of  checks  and  always  re- 
mains a  bank  credit  or  deposit.  This  fact  is  shown  by 
the  statement  already  given  from  the  Comptroller's  re- 
port. 

The  popular  idea  that  the  bank  lends  the  depositors' 
money  is  in  fact  a  delusion.  "What  really  happens  is 
that  the  bank  lends  its  credit  to  whomsoever  it  will,  tak- 
ing in  exchange  for  it  the  borrower's  less  known  credit 
plus  his  security.  The  bank  turns  out  its  credit  in  two 
general  forms  —  bank  notes  and  bank  deposits. 

The  fiction  by  which  the  banker  gives  the  borrower 
credit  for  a  deposit  is  convenient,  and,  in  itself,  harm- 
less. But  like  any  other  fallacy,  when  the  fact  that  it 
is  a  fiction  is  lost  sight  of,  and  this  transaction  is  mis- 
taken for  a  money  transaction,  then  it  becomes  danger- 


EVOLUTIOX  OF  EXCHANGE  SYSTEM      27 

ous.  We  will  return  subsequently  to  a  discussion  of  the 
eiFects  of  this  fiction^  continuing  for  the  present  with 
the  analysis  of  this  bank's  operations. 

The  bank^  up  to  this  stage^  has  coined  but  $1,000  of 
our  medium  of  exchange,  of  which  $15  is  profit.  Now 
it  goes  on  making  loans  in  the  same  way  up  to  say  two 
hundred  thousand  dollars.  It  does  not  seem  possible  for 
a  bank  with  but  ten  thousand  dollars  capital  and  fifty 
thousand  dollars  cash  deposits  to  lend  two  hundred 
thousand  dollars.  However,  this  is  not  only  possible, 
but,  what  is  still  more  remarkable,  the  bank  will  still 
have  left  the  sixty  thousand  dollars  in  cash  and  probably 
more.     Our  bank's  statement  would  then  be: 

RESOURCES  LIABILITIES 

Cash $  60,000  Capital $   10,000 

Loans  and  Deposits    247,000 

Discounts  .  .  200,000  Profit 3,000 


$260,000  $260,000 

Like  any  other  sleight  of  hand  this  magic  is  very 
simple  when  explained.  The  banker  is  not  lending  the 
depositors'  money,  as  is  commonly  supposed,  nor  any 
other  money.     He  is  lending  the  bank's  credit. 

The  amount  of  credit  which  our  little  ten  thousand 
dollar  bank  with  its  fifty  thousand  dollars  of  real  money 
in  deposits  can  lend,  depends  upon  whether  it  is  a  state 
or  a  national  bank,  and  upon  the  nature  of  its  deposits. 
Most  state  laws,  like  the  national  bank  law,  require 
each  bank  to  carry  a  certain  cash  reserve,  the  amount  of 
which  depends  upon  the  law  governing  the  bank,  the 
kind  of  accounts  the  bank  carries,  and  whether  it  is  a 


28  THE  STRANGLE  HOLD 

country  or  a  city  bank.  This  money  is  called  the  legal 
reserve,  and  represents  a  certain  percentage  of  the 
deposits  which  must  be  held  either  in  the  bank's  own 
vaults  in  the  form  of  cash  or  approved  securities,  or  to 
its  credit  by  a  reserve  agent.  This  cash  reserve  is  nec- 
essary as  a  bulkhead  against  the  loss  of  public  con- 
fidence. It  is  ready  money  with  which  payment  can  be 
made  in  case  of  a  sudden  demand  from  frightened  de- 
positors. For  this  reason,  bank  laws  require  a  larger 
reserve  against  demand  deposits  than  against  savings 
deposits,  because  the  latter  are  protected  by  the  require- 
ment of  notice  before  withdrawal.  The  time  given  by 
this  notice  gives  the  bank  an  opportunity  to  realize  upon 
its  assets,  should  such  need  arise.  The  legal  reserve 
ranges  from  nothing  in  some  states  to  twenty  per  cent 
in  others. 

Let  us  assume  that  our  little  bank  is  required  to  keep 
a  10%  reserve.  Then  for  every  dollar  it  has  in  cash 
or  on  deposit  with  a  reserve  agent  it  can  carry  $10  in 
deposits.  We  have  assumed  that  the  bank  has  $60,000 
so  with  this  amoimt  as  reserve  it  can  run  its  deposits  up 
to  ten  times  that  amount  or  $600,000.  Of  this  amount 
fifty  thousand  dollars  are  deposits  of  cash,  which,  de- 
ducted from  the  $600,000  fixed  by  the  legal  reserve  law 
as  the  limit  of  deposits,  leaves  a  balance  of  five  hundred 
and  fifty  thousand  dollars  of  deposits  which  the  bank 
can  create  by  making  loans.  The  deposits — bank  credit 
— created  by  these  loans  passes  for  money  in  the  shape 
of  checks  and  drafts  and  are  in  no  way  distinguishable 
from  the  dpeosits — bank  credit — created  by  deposits  of 
cash.     If  the  legal  reserve  requirement  then  is  ten  per 


EVOLUTION  OF  EXCHANGE  SYSTEM      29^ 

cent,  for  every  dollar  of  real  money  deposited  or  paid 
in  for  stock  and  held,  the  bank  can  issue  or  lend  nine 
dollars  of  its  credit  for  use  as  money. 

And  even  bank  reserves,  it  may  be  said,  are  not  always 
money.  Some  states  permit  banks  to  count  as  reserves 
the  bonds  of  that  particular  state  and  the  notes  of 
national  banks.  Neither  of  these  are  money,  but  only 
promises  to  pay  money. 

In  the  first  chapter  we  saw  that  the  causes  for  the 
social  unrest  of  today  and  its  attendant  evils  arise  out 
of  that  defect  in  our  monetary  system  which  is 
responsible  for  the  varying  price  of  the  dollar  —  or,  in 
other  words,  for  varying  prices.  The  phenomena  known 
as  the  High  Cost  of  Living  and  the  Low  Cost  of  Living, 
and  the  distressful  conditions  that  are  the  result  of 
these  phenomena  are  due  in  their  entirety  to  the  vmstable 
value  of  the  dollar. 

In  this  chapter  we  have  seen  that  the  greater  part 
of  our  money  is  bank  credit.  We  have  seen  that  at  least 
ninetj'^-five  per  cent  of  our  circulating  medium  —  of  our 
money — exists  in  the  form  of  bank  deposits.  And  we 
have  furthermore  investigated  the  way  in  which  this 
bank  credit  is  created,  and  have  seen  that  bankers  are 
alone  responsible  for  its  issuance,  that  they  can  increase 
it  by  granting  loans  or  curtail  it  by  refusing  them  as  they 
see  fit.  They  can  also  grant  a  loan  to  one  and  refuse  it 
to  another  at  will. 

Putting  the  conclusions  of  these  two  chapters  to- 
gether, it  at  once  follows  that  the  industrial  evils 
described  are  due  to  some  defect  in  our  banking  system. 


so  THE  STRANGLE  HOLD 

since  it  is  this  system  which  controls  our  circulating 
medium. 

Furthermore,  we  saw  that  under  the  present  system 
the  banker  is  acting  as  a  brake  on  the  wheels  of  pros- 
perity; we  noted,  however,  that  this  was  not  necessarily 
the  banker's  fault,  but  may  be  due  to  a  defect  in  the 
system  which  does  not  permit  him  to  extend  credit 
wherever  credit  should  be  extended  in  the  furtherance 
of  the  best  interests  of  society. 

We  have  now  shown  what  we  started  out  to  show.  It 
is  now  clear  that  both  series  of  problems  and  defects 
referred  to  in  the  first  chapter  have  a  common  origin. 
They  are  both  due  to  a  defective  system  of  issuing  bank 
credit.  The  problem,  then,  which  at  first  seemed  a  two- 
fold one,  is  now  seen  to  be  one  —  the  problem  of  cor- 
recting the  defect  in  our  banking  system.  It  is  the 
problem  of  devising  a  remedy  that  can  be  applied  to 
existing  institutions  without  disturbing  business  or  up- 
setting commercial  relations. 

Sut  before  doing  this,  it  is  necessary  to  see  clearly 
what  the  defect  is.    This  is  our  next  step. 


CHAPTER  III 

THE  MEDIUM  OF  EXCHANGE 
A  PUBLIC  UTILITY 

IN  the  preceding  chapter  it  was  seen  that  aU  but  a 
relatively  insignificant  percentage  of  our  commerce 
today  is  carried  on  by  means  of  bank  credit  —  in  other 
words,  that  bank  credit  is  our  present  medium  of 
exchange. 

And  it  was  shown  that  in  the  development  of  com- 
merce, one  means  of  changing  ownership  after  an- 
other came  to  be  used.  As  commerce  outgrew  the  means 
in  use  another  had  to  be  supplied. 

It  was  noted  that  primitive  barter,  because  it  was  too 
cumbersome  and  unsatisfactory,  gave  way  to  the  practice 
of  using  one  or  two  commodities  as  a  medium  of 
exchange.  Gradually  the  commodities  that  were  best 
adapted  to  this  use  —  gold  and  silver  — '  came  to  replace 
other  commodities,  shells,  tobacco,  iron,  copper,  and  so 
forth.  Subsequently  gold  largely  took  the  place  of 
silver  on  account  of  its  higher  value  and  consequent 
greater  efficiency.  We  saw  finally  how  bank  credit, 
based  on  gold,  arose  and  that  on  account  of  its  greater 
convenience  and  adaptability  to  the  needs  of  modern 
industry  and  commerce,  it  has  reached  the  position  that 
it  now  occupies,  practically  all  of  our  exchange  trans- 
action being  carried  on  through  the  use  of  this  medium. 

And  we  have  also  looked  into  a  few  of  the  most 
31 


32  THE  STRANGLE  HOLD 

obvious  of  our  industrial  ills  today,  and  have  seen,  that 
they  are  connected  with,  or  rather  that  they  spring 
from,  some  defect  in  our  monetary  and  banking  system. 

The  most  natural  conclusion  to  be  drawn  from  these 
premises  is,  that,  just  as  commerce  outgrew  each  former 
medium  used  for  exchange,  so  it  has  now  outgrown  the 
present  one. 

Commerce  stands  in  need  of  a  medium  that  will  give 
it  freer  scope  for  its  possibilities.  It  must  be  enlarged 
so  that  industry  wiU  no  longer  be  hampered  by  a  medium 
of  exchange  that  restricts  and  represses  business,  that 
turns  it  inward  like  an  ingrowing  nail,  there  to  rankle 
and  fester  and  breed  all  the  economic  trouble  and 
industrial  turmoil  that  afflict  us  today. 

Because  our  present  system  has  been  outgrown  does 
not  prove  that  there  is  anything  inherently  bad  in  the 
development  of  bank  credit.  Its  use  was  a  natural  step, 
a  step  in  advance,  and  by  no  means  a  step  in  the  wrong 
direction.  Its  use  gave  industry  wider  scope,  and  so 
contributed  to  the  advancement  of  civilization. 

And  if  now  it  has  been  outstripped  by  industry,  this 
does  not  necessarily  imply  that  it  must  be  cast  aside, 
or  that  a  search  for  a  new  and  entirely  different  ex- 
change medium  is  necessary  to  be  instituted. 

The  case  is  really  quite  the  contrary.  No  radical 
change  is  necessary.  All  that  is  required  will  be  to 
modify  the  method  of  issuing  our  present  medium  in 
order  to  put  it  on  a  firmer,  more  logical  basis,  and  by 
removing  the  fault  that  hampers  it  adapt  it  to  present 
conditions. 

It  is  only  necessary  to  modernize  bank  credit,  and  set 


MONEY  A  PUBLIC  UTILITY  33 

it  upon  a  more  scientific  footing.  Wlien  this  has  been 
done,  it  will  be  fully  adequate  to  all  our  needs.  Industry 
will  no  longer  be  "limited,  cribbed,  confined,"  but  will 
be  free  to  develop  the  immense  possibilities  that  are 
latent  within  it. 

It  is  a  most  natural  result  that  enlarged  business  re- 
quires enlarged  facilities  for  doing  business.  All  our 
efforts  in  achieving  this  improvement,  by  reorganizing 
our  methods,  will  be  repaid  a  thousand-fold. 

But  before  attempting  such  a  task,  we  must  see  more 
clearly  just  where  our  present  system  is  at  fault;  we 
must  look  more  closely  into  bank  credit,  as  it  exists 
today,  and  determine  precisely  where  it  is  inadequate. 
Then,  and  only  then,  can  we  seek  to  apply  a  practical 
remedy.  With  this  purpose  in  mind,  let  us  look  once 
more  into  the  way  in  which  bank  credit  is  created. 

Bank  credit  may  be  created  in  either  of  the  following 
two  ways: 

When  a  customer  deposits  money,  the  banker  gives 
him  credit  in  like  amount  on  the  books,  and  makes  a 
memorandum  to  that  effect  in  the  customer's  pass-book. 
The  money  deposited  becomes  the  property  of  the  bank, 
in  exchange  for  which  the  customer  receives  the  bank's 
promise  to  repay  the  amount  on  demand.  In  other 
words,  credit  on  the  bank's  books  is  bank  credit,  and  is 
created  first  by  bank  deposits. 

When  a  customer  goes  to  a  bank  and  "borrows  money," 
he  puts  up  his  note  with  his  securities,  if  the  note  be 
secured,  and  the  banker  gives  him  credit  for  the  amount 
he  has  borrowed  in  the  same  way  as  he  gives  the  cash 
depositor  credit  for  his  deposit.     The  banker  makes  the 


34  THE  STRANGLE  HOLD 

same  memorandum  in  a  Borrower's  pass  book  that  he 
does  in  a  depositor's.  Bank  credit,  then,  is  also  created 
by  bank  loans. 

The  point  in  both  these  cases  is  not  that  bank  credit 
is  created  by  two  entirely  different  methods,  but  that 
in  each  method  the  question  as  to  whether  the  bank  credit 
shall  or  shall  not  be  created  is  left  entirely  to  tlie  banker. 
He  may  make  the  loan,  or  he  may  refuse  to  make  it. 
If  he  refuses  no  one  can  compel  him  to  alter  his  de- 
cision, regardless  of  what  may  be  the  borrower's  just 
deserts. 

In  the  other  method  too,  he  may  refuse  the  deposit  if 
he  so  desires.  It  is  not  often  that  a  banker  refuses  to 
let  a  customer  make  a  deposit,  but  it  is  quite  possible 
that  he  may  regard  some  particular  person's  account  as 
undesirable,  and  in  that  case  there  is  no  means  of  com- 
pelling him  to  accept  the  deposit. 

The  credit  thus  created  on  the  bank's  books  is  trans- 
ferred from  one  to  the  other  by  checks  and  trade  is  car- 
ried on  almost  exclusively  by  its  use,  it  is  our  money,  so 
the  bank  has  virtually  become  our  mint  and  its  operation 
is  a  matter  of  vital  interest  to  all  of  us.  A  full  analysis 
of  the  effect  of  this  usurpation  of  a  great  government 
function  by  the  bank  will  reveal  the  cause  of  our  finan- 
cial ills. 

We  have  seen  that  THE  POWER  TO  GRANT  OR 
DENY  A  LOAN,  AND  SO  THE  POWER  TO  CON- 
TROL THE  MEDIUM  OF  EXCHANGE,  RESTS 
WITH  THE  FINANCE  COMMITTEE  OF  THE 
BOARD  OF  DIRECTORS  OF  THE  BANK.  This 
simple  act  of  routine  business  is  performed  every  day 


MONEY  A  PUBLIC  UTILITY  35 

by  hundreds  of  good  citizens,  who  would  indignantly 
resent  any  suggestion  that  by  this  act  they  are  usurping 
one  of  the  most  vital  functions  of  our  government — that 
of  issuing  our  money  by  minting  private  credit  into  the 
medium  of  exchange. 

But  because  the  bank's  credit,  which  this  committee 
controls,  is  our  medium  of  exchange,  and  because  the 
use  of  the  medium  is  necessary  in  every  walk  of  life, 
it  is  clear  that  on  the  decision  of  this  committee  depends 
individual  liberty,  success,  and  happiness,  as  well  as 
national  efficiency  and  progress. 

The  great  importance  of  its  decisions  make  this  little 
assemblage  of  business  men  a  powerful  group  of  auto- 
crats. Their  power  is  the  more  dangerous  because  of  the 
fact  that  their  acts  are  protected  from  even  the  slightest 
public  protest  or  criticism.  Both  the  committee  and  its 
victims  fail  to  realize  the  power  that  it  wields. 

Right  here,  in  these  committees,  lies  concealed  the 
"Money  Trust"  of  which  we  hear  so  much.  The  control 
of  the  greatest  public  utility  is  in  their  hands. 

This  is  the  clue  to  our  entire  problem.  The  PRI- 
VATE CONTROL  OF  THE  MEDIUM  OF  EX- 
CHANGE SUBJECTS  THE  WHOLE  COMMUNITY 
TO  THE  WILL  OF  THE  FEW. 

Many  will  note  a  resemblance  here  to  another  great 
problem — the  railroad  problem.  As  many  will  remem- 
ber, the  private,  irresponsible  control  of  the  mediimi  of 
transportation  by  a  small  group  placed  the  entire  com- 
munity within  their  power. 

Since  a  similar  trouble  was  overcome  in  that  public 
utility,  a  review  of  the  problem  presented  there,  and  of 


•36  THE  STRANGLE  HOLD 

the  means  by  which  it  was  solved  should  prove  of  con- 
siderable help  in  the  present  problem. 

In  the  days  when  railroads  were  entirely  in  private 
hands,  and  subject  to  no  public  control  and  regulation, 
the  principle  which  governed  all  rates  was  to  charge  that 
rate,  both  for  passenger  and  freight  service,  which  would 
yield  to  tlie  railroad  lines  the  largest  net  returns,  re- 
gardless   of  the   community's    interests    in   the    matter. 

For  those  who  remember  this  period  in  our  history,  no 
explanation  is  necessary.  Our  sad  experience  with  com- 
plicated and  unjust  railroad  tariffs,  unpublished  and 
secretly  administered,  and  with  rebates,  drawbacks,  ter- 
minal rates,  quantity  classifications,  and  an  rmtold  num- 
ber of  similar  abuses,  will  not  easily  be  forgotten.  But 
for  the  benefit  of  the  yovmger  generation,  let  us  take 
an  example. 

When  railroads  were  privately  controlled,  California's 
supply  of  kerosene  came  from  the  East.  Let  us  say  it 
cost  fifteen  cents  per  gallon  to  produce  kerosene  in,  we 
will  say,  Ohio,  and  that  it  sold  regularly  in  California  at 
forty  cents.  Then  the  railroad  would  figure  perhaps  a 
profit  of  five  cents  for  the  producer  in  Ohio,  and  perhaps 
another  ten  cents  profit  for  the  seller  in  California.  It 
would  then  fix  its  rate  at  the  difference  between  the  cost 
plus  the  two  profits  allowed,  and  the  selling  price  of 
forty  cents,  that  is,  ten  cents. 

The  only  principle  governing  this  rate  was,  "at  what 
rate  can  that  particular  business  be  made  to  pay  the 
railroad  the  most  money?" 

Different  rates  were  quoted  to  different  sliippers. 
Business    success    depended    more   on    "pull"    than    on 


MONEY  A  PUBLIC  UTILITY  37 

"push."     A  little  pull  with  the  railroad  was  worth  any 
amount  of  energy  and  business  ability. 

To  demonstrate  this  last  statement,  let  us  continue  our 
illustration  a  little  further. 

Suppose  the  railroad  raised  the  rate  on  kerosene  from 
Ohio  to  California  by  ten  cents,  making  it  twenty  cents. 
It  is  not  likely  that  this  increased  rate  would  be  absorbed 
by  either  producer  or  retailer.  It  would  be  shifted  to 
the  consumer,  who  would  have  to  pay  fifty  instead  of 
forty  cents  per  gallon.  This  would  result  in  decreased 
consumption,  and  consequently  decreased  business  both 
for  producer  and  railroad. 

But  now  suppose  that  certain  of  the  interests  produc- 
ing kerosene  in  Ohio  also  possessed  a  sufficient  control 
over  the  railroad  to  cause  the  latter  to  rebate  eight 
cents  per  gallon  of  the  freight  rate  on  kerosene  to  them. 
In  other  words,  these  producers  would  pay  the  railroad 
the  full  twenty  cents  per  gallon  rate,  and  later  the  rail- 
road would  pay  back  to  them  eight  cents  per  gallon. 
Then  instead  of  only  five  cents  per  gallon  these  interests 
would  make  thirteen — a  good  compensation  for  the 
diminished  sales.  The  extra  two  cents  per  gallon  from 
these  producers,  coupled  with  the  extra  ten  cents  per 
gallon  from  other  producers,  who  did  not  enjoy  the 
rebate,  would  amply  repay  the  railroad  for  the  shrink- 
age in  traffic  due  to  shrinkage  in  consumption. 

The  favored  kerosene  producers  and  the  railroads 
would  both  be  pleased  with  the  arrangement,  even  though 
the  demand  for  kerosene  had  diminished. 

But  how  about  the  producer  in  Ohio  who  was  not 
favored,   and   had   no  compensation   for   the   decreased 


88  THE  STRANGLE  HOLD 

business  due  to  the  increased  price?  And  how  about 
the  consumer,  who  now  had  to  pay  fifty  instead  of  forty 
cents  per  gallon,  and  consequently  had  to  content  him- 
self with  a  smaller  quantity  of  kerosene  than  before? 

Since  that  time  railroad  service  has  come  xinder  public 
control.  No  longer  are  railroads  permitted  to  increase 
rates  arbitrarily,  nor  to  favor  some  shippers  in  prefer- 
ence to  others.  All  shippers  are  entitled  to  the  same 
services,  and  prices  no  longer  fluctuate  at  the  will  of 
the  railroad  interests.  And  right  here  let  us  point  out 
that  neither  in  the  case  of  the  railroads,  nor  in  the  case 
of  the  banks,  are  we  interested  in  the  operation  of  either 
of  these  public  utilities,  except  in  so  far  as  their  opera- 
tion affects  the  quality  of  the  services  they  render. 

It  is  in  the  services  that  we  are  interested,  and  so  long 
as  all  customers  may  know  at  all  times  what  service  they 
may  expect,  and  may  be  sure  of  receiving  the  same 
treatment  as  any  other  customer,  it  is  of  little  importance 
to  us,  the  public,  as  to  how  that  service  is  produced. 

Banks  as  well  as  railroads  should  be  privately  owned 
and  operated,  but  their  SERVICES  should  be  under 
public  control  and  regulation  so  that  everyone  may  be 
certain  of  obtaining  the  most  efficient  service  at  the 
fairest  cost  and  a  service  equal  to  that  of  any  other  user. 

Because  the  banks  issue  our  medium  of  exchange  the 
banking  and  railroad  businesses  are  both  public  utilities. 

The  only  essential  difference  between  the  services 
rendered  by  these  two  utilities  is  that  the  cars  of  the 
railroad  are  employed  to  change  the  location  of  goods 
while  the  credit  of  the  bank  is  used  to  change  their 
ownership. 


MONEY  A  PUBLIC  UTILITY  39 

In  abstract  principle  both  are  the  same,  and  the  effect 
of  private  or  public  control  of  either  has  the  same  result. 

It  is  evident  that  as  long  as  a  privately  controlled 
railroad  could  charge  "all  the  traffic  would  bear,"  and 
could  then  rebate  a  portion  to  favored  shippers,  or  could 
favor  them  in  other  ways,  that  it  was  practically  denying 
to  those  shippers  not  favored  the  right  to  use  the  rail- 
roads. 

Precisely  the  same  thing  happens  when  a  bank  denies 
a  customer  a  loan  for  which  the  customer  can  offer 
security.  It  is  denying  to  that  customer  the  right  to 
use  a  medium  which  is  much  more  important  to  him  than 
the  railroad. 

It  is  in  the  fact  that  the  bank  can  deny  anyone  the 
use  of  this  great  public  utility  that  the  greatest  fault 
of  our  present  financial,  industrial  and  social  system  lies. 

In  order  to  make  the  analogy  still  clearer,  we  may 
compare  the  security  offered  and  the  rate  of  interest 
paid  by  the  customer  of  the  bank  to  the  freight-rate 
paid  by  the  customer  of  the  railroad — the  shipper. 

Under  public  control  every  railroad  is  now  required  to 
give  every  shipper,  who  can  pay  its  rate,  the  same 
treatment  as  every  other  shipper  receives.  It  cannot 
deny  its  service  to  any  particular  shipper  on  account 
of  the  prejudice  or  the  personal  interests  of  any  person 
or  group  of  persons  who  may  happen  to  be  in  control  of 
the  railroad. 

And  the  medium  of  exchange,  the  service  offered  by 
the  bank,  should  be  under  similar  public  control,  so 
that  every  bank  will  be  required  to  give  identical  treat- 
ment to  every  customer  who  can  comply  with  require- 


40  THE  STRANGLE  HOLD 

mcnts — who  is  able,  in  other  words,  to  offer  good  secur- 
ity and  pay  the  rate  of  interest.  The  decision,  whether 
to  make  the  loan  or  not,  should  not  be  permitted  to  lie 
in  the  hands  of  private  persons,  who  may  decide  accord- 
ing to  their  own  personal  prejudices  or  private  interests. 

It  may  perhaps  occur  to  some  here  that  the  force  of 
competition  will  overcome  the  effect  of  personal  pre- 
judices and  private  interests  of  the  bankers.  In  answer 
to  such  an  argument  it  is  merely  necessary  to  say  that 
the  force  of  competition  does  not  operate,  and  to  prove 
this  statement  we  will  again  call  upon  our  analogy  to 
the  railroad. 

It  was  thought  that  the  free  play  of  competition 
untouched  by  public  regulation,  would  be  sufficient  to 
insure  fair  play  to  all  shippers.  The  countless  instances 
of  rebates,  secret  tariffs,  and  similar  abuses  that  char- 
acterized the  day  of  unregulated  railroad  competition, 
proved  beyond  all  doubt  the  necessity  for  public  regtila- 
tion. 

If  we  desire  to  benefit  by  past  experience — and  who 
does  not.'' — we  must  apply  the  same  rule  to  our  other 
great  public  utility. 

Just  as  the  argument  that  since  it  was  the  railroad's 
business  to  secure  the  transportation  of  goods,  the 
railroad  would  afford  the  best  possible  treatment  to  all 
customers,  was  found  to  be  invalid,  so  the  argument 
that,  since  it  is  the  banker's  business  to  extend  loans 
wherever  possible,  he  will  extend  equal  services  to  all 
customers,  will  also  be  found  fallacious. 

There  is  one  more  point  of  striking  similarity  be- 
tween the  two  public  utilities,  the  railroad  business  and 


MONEY  A  PUBLIC  UTILITY  41 

the  banking  business,  that  should  be  referred  to  before 
our  analogy  between  the  services  of  these  two  utilities  is 
completed.  This  point  is  the  similarity  in  effect  upon 
the  community  of  a  denial  of,  or  break  down  in,  the 
services  of  either. 

The  effect  of  a  breakdown  in  railroad  service  was 
illustrated  with  gripping  force  in  Mexico  during  the 
Carranza  regime,  when  thousands  of  Mexicans  died  from 
actual  starvation.  Beset  by  bandits  and  lacking  credit, 
the  government  was  unable  to  obtain  adequate  rolling 
stock  for  its  railways,  which  were,  ■with  minor  exceptions, 
federally  owned.  Owing  to  this  lack  of  rolling  stock, 
the  crops  could  not  be  moved.  In  the  agricultural  dis- 
tricts corn  was  cheap,  for  it  could  not  be  sent  to  other 
markets,  and  so  glutted  the  local  markets.  Business 
stopped  from  lack  of  transportation.  On  the  other 
hand,  in  the  mining  districts,  many  people  died  from 
sheer  starvation,  for  owing  to  the  lack  of  adequate 
means  of  transportation,  corn  could  not  be  brought  in 
from  agricultural  districts.  What  corn  there  was  con- 
sequently rose  to  so  high  a  price,  and  was  so  scarce  that 
many  could  not  get  it  at  all,  and  died  from  famine. 

Just  as  "contraction"  of  the  medium  of  transportation 
caused  hard  times,  so  "contraction"  in  the  medium  of 
exchange  causes  hard  times,  as  will  be  sho^vn  in  the 
following  illustration. 

A  man,  let  us  say,  owns  an  unimproved  farm  worth 
$10,000,  and  is  desirous  of  improving  it.  He  needs, 
say,  $2,500  for  barns  and  sheds,  and  $3,500  for  imple- 
ments, seed  and  running  expenses  until  he  can  harvest 
his  crop.     He  has  no  other  means  of  raising  the  money 


42  THE  STRANGLE  HOLD 

except  on  the  land.  He  is  willing  to  give  a  mortgage 
for  the  $6,000  needed,  agreeing  to  spend  the  money  on 
improvements  as  stated,  which  will  make  the  security 
offered,  the  farm,  worth  from  twelve  to  fifteen  thousand 
dollars.     A  good  security  for  the  loan  of  $6,000. 

The  lumber  agent  will  not  let  him  have  the  lumber, 
the  carpenters  will  not  put  in  their  work,  the  tractor 
men  will  not  furnish  the  tractor,  and  the  implement  and 
seed  dealers  will  not  furnish  his  other  necessities  unless 
he  is  able  to  pay  them.  He  will  not  be  able  to  pay  them 
until  he  gets  his  crops,  perhaps  not  until  he  has  sold  the 
crops  of  a  number  of  years.  But  if  he  succeeds  in  rais- 
ing the  loan  from  his  bank,  he  will  be  able  to  raise  the 
crops  and  pay  it  back. 

If  he  is  granted  the  loan,  then  he  will  be  able  to  carry 
out  his  proposed  improvements.  The  result  will  be  in 
the  immediate  future,  a  demand  for  lumber,  farm  imple- 
ments, and  labor  to  the  extent  of  $6,000,  and  prices  and 
wages  will  rise  or  be  maintained  as  a  result.  In  the 
slightly  more  distant  future,  the  result  will  be  larger 
and  better  crops,  and  so  society  will  twice  be  benefited, 
once  in  increased  business  and  again  in  a  better  supply. 

But  if  the  loan  is  refused,  the  result  will  be  the  op- 
posite. The  demand  for  the  commodities  and  for  labor 
will  be  lessened  to  the  extent  of  $6,000,  thus  depressing 
prices  and  wages.  And  the  farmer,  finding  no  other 
outlet  for  his  energies,  and  no  other  means  of  getting  a 
living,  will  have  to  go  to  work  for  somebody  who  can 
get  the  use  of  the  medium  of  exchange.  Not  only  will 
the  goods  which  he  would  have  bought  and  the  labor 
which  he  would  have  employed  remain  on  the  market  to 


MONEY  A  PUBLIC  UTILITY  43 

depress  prices  but  also  his  labor  will  be  thrown  on  the 
market,  thus  further  depressing  the  wages  of  all  labor. 
In  general,  then,  if  the  loan  is  for  any  reason  refused  it 
is  not  a  personal  matter  between  the  would  be  farmer 
and  the  banker  for  the  result  will  be  a  tendency  toward 
hard  times  and  loss  for  the  whole  community. 

This  denial  of  the  use  of  the  medium  of  exchange, 
then,  produces  "contraction,"  which  unfailingly  results 
in  falling  prices,  lower  wages,  lessened  production, 
fewer  comforts,  and  a  decrease  in  happiness  just  as 
inadequate  railroad  service  does. 

Financial  writers  formerly  blamed  such  evil  conditions 
upon  "over  production." 

They  calmly  told  us  that  the  reason  prices  fell  and 
business  slumped  was  because  the  market  was  over 
supplied. 

But  now,  with  want  and  starvation  crying  for  our 
surplus,  with  our  ships  tied  to  the  dock  and  the  rail- 
roads suffering  for  lack  of  freight  the  term,  "over  pro- 
duction," would  sound  ridiculous  so  the  same  condition 
is  described  as,   "lack  of  demand." 

The  latest  term  is,  "a  buyers'  strike."  This  term 
aptly  describes  the  condition  for  of  course  all  buyers 
strike,  that  is  they  do  not  buy,  when  they  have  nothing 
to  buy  with,  and  we  have  just  described  how  the  farmer, 
unable  to  get  his  loan,  "struck"  and  went  to  work. 

The  term  "Buyers'  Strike,"  however,  is  not  well 
chosen,  for  it  puts  the  blame  in  the  wrong  place.  As 
we  have  seen  in  the  farmer's  case,  the  failure  to  buy  was 
no  fault  of  the  buyer  but  was  due  to  the  banker's  refusal 
to  make  the  loan,  so  this  failure  to  buy  and  our  present 


44  THE  STRANGLE  HOLD 

bad  condition  would  bo  rnucli  more  accurately  described 
if  termed  a  "bankers'  strike." 

All  such  terms  as,  "Over  Production,"  "Lack  of  De- 
mand" and  "Buyers'  Strike"  are  misleading  for  there 
can  be  no  over  production  and  buyers  will  not  strike  so 
long  as  desire  remains  unsatisfied.  The  fact  that  present 
unsatisfactory  business  conditions  are  caused  entirely  by 
bankers  and  not  by  buyers  will  soon  be  clearly  estab- 
lished. 

This  condition  will  be  explained  more  fully  in  the 
next  chapter,  in  which  we  will  examine  closely  the 
reasons  for,  and  the  results  of,  a  denial  of  the  use  of  the 
medium  of  exchange  to  whoever  deserves  to  have  its  use 
extended  to  him.  And  it  will  be  shown  that  the  denial  is 
due  entirely  to  the  private  control  of  our  greatest  public 
utility. 

The  farmer  should  have  the  same  right  to  the  use  of 
the  medium  of  exchange  that  a  shipper  has  to  the  use 
of  the  medium  of  transportation. 

In  the  case  of  the  shipper,  the  value  of  his  shipment 
is  a  guarantee  that  he  will  pay  for  the  use  of  the  rail- 
road. With  the  farmer,  land  and  crop  insure  payment 
for  the  use  of  the  bank.  And  any  abridgment  of  this 
natural  right  not  only  denies  him  freedom  of  action,  but 
results  in  loss  to  the  entire  community. 

Due  to  this  denial  the  lumber,  implements,  seed  and 
labor  the  farmer  would  have  bought  remain  on  the  market 
to  depress  the  prices  of  those  commodities  because  he 
could  not  buy  what  he  wanted  to  buy  and  the  crops 
which  he  would  have  raised  are  not  raised  for  the  same 
reason.     Society,  therefore,  instead  of  enjoying  a  double 


MONEY  A  PUBLIC  UTILITY  45 

gain,  suffers  a  double  loss  on  account  of  the  denial. 

This  is  just  a  statement,  in  particular  form,  of  what 
we  have  demonstrated  in  this  chapter,  namely,  that  the 
fault  of  our  present  financial  system  lies  in  the  fact  that 
the  banks  control  the  greatest  public  utility;  a  utility 
which  all  must  use  is  held  in  private  hands,  and  from  this 
source  springs  practically  all  of  our  present  financial, 
industrial  and  social  troubles. 

Let  us  now  proceed  to  examine  in  greater  detail  the 
effects  of  this  private  control  so  as  to  see  how  it  pro- 
duces the  hardships  from  which  the  country  suffers. 

If  it  is  proved  that  our  present  business  depression  is 
due  to  this  cause  our  problem  is  then  fast  approaching 
solution.  This  fact  will  be  clinched  in  the  next  two 
chapters. 


CHAPTER  IV 
THE  INDUSTRIAL  STRAIT-JACKET 

IN  the  last  chapter  it  was  shown,  by  analogy  with  a 
similar  problem  in  the  ease  of  the  railroads,  that  the 
private  control  of  bank  credit  lies  at  the  root  of  our 
present  industrial  troubles. 

In  this  chapter  it  is  proposed  to  further  investigate 
this  proposition  in  order  to  show  conclusively,  the  evils 
of  private  control  of  the  medimn  of  exchange,  and 
secondly,  in  order  to  gain  a  more  definite  and  a  clearer 
conception  of  the  fault  so  that  we  may  be  aided  in  our 
search  for  a  remedy  and  may  better  appreciate  the 
remedy  when  it  is  found. 

In  the  early  part  of  this  book  we  saw  how  a  great 
part,  if  not  all,  of  the  evils  which  afflict  industry,  and, 
in  fact,  society  as  a  whole,  at  the  present  time,  are  evils 
connected  with  the  changing  cost  of  living.  In  other 
words,  they  are  due  to  the  fluctuating  general  level  of 
prices,  or  differently  expressed,  to  the  variation  in  the 
purchasing  power  or  price  of  the  dollar. 

This  variation  in  the  value  of  the  dollar  is  due  to  the 
phenomena  called  expansion  and  contraction  or  inflation 
and  deflation,  which  condition  arises  from  the  fact  that 
the  volume  of  the  medium  of  exchange  does  not  vary 
in  accordance  with  the  needs  of  business. 

It  is  clear  that  if  the  volume  of  business  remains 
constant  and  the  medium  of  exchange  is  doubled,  prices 

46 


THE  INDUSTRIAL  STRAIT- JACKET        47 

■will  in  the  long  run  be  doubled — that  is,  they  will  tend 
to  be  doubled.  For  now  there  will  be  two  dollars  to  do 
the  work  that  formerly  one  dollar  did. 

On  the  other  hand,  if  the  volume  of  the  medium  of 
exchange  remains  the  same,  and  the  amount  of  business 
done,  the  total  amount  of  goods  produced  and  handled 
is  doubled,  then  prices  will  tend  to  be  cut  in  half.  For 
now  there  will  only  be  one  dollar  to  do  what  two  dollars 
did  before;  each  dollar  will  have  to  be  twice  as  effec- 
tive as  before. 

But  if  the  medium  of  exchange  varies  hand  in  hand 
with  the  volume  of  business,  then  there  will  be  no 
fluctuation  in  prices  as  a  whole. 

That  is  to  say,  if  the  volume  of  business  is  doubled, 
and  the  medium  of  exchange  is  doubled  at  the  same 
time,  each  dollar  will  have  to  do  just  the  same  amount 
as  before,  and  prices  in  that  case  will  remain  constant. 
The  same  condition  will  result  if  the  medium  of  exchange 
and  the  volume  of  business  are  both  halved. 

This  is  the  object  of  practically  every  monetary  re- 
form. It  is  the  object,  for  instance,  of  the  Federal 
Reserve  System.  But  it  is  an  object  that  has  not  been 
accomplished,  for  we  still  have  our  varying  general  price 
levels.  The  cost  of  living  has  not  ceased  to  rise  and 
fall  since  the  introduction  of  the  Federal  Reserve  Sys- 
tem, as  has  been  clearly  demonstrated  in  the  past  few 
years. 

It  should  be  held  in  mind  during  this  discussion  that 
we  are  speaking,  not  of  the  variations  in  price  of  par- 
ticular com.modities,  but  of  variations  in  the  general 
level  of  prices  as  a  whole.     Variations  in  the  price  of 


48  THE  STRANGLE  HOLD 

particular  commodities  are  due  to  variations  in  the 
demand  for,  and  the  supply  of  these  commodities. 

But  variation  in  the  general  price  level,  the  price  of 
all  the  commodities  consumed  by  a  community  taken  as 
a  whole,  are  due  to  variations  in  the  price  of  the  dollar, 
that  is  in  the  purchasing  power  of  the  dollar.  The 
dollar  value  varies  with  the  ratio  between  the  volume  of 
the  medium  of  exchange — the  number  of  dollars  in  circu- 
lation, and  the  volume  of  business  transacted. 

Variations  in  the  purchasing  power  of  the  dollar  are 
the  cause  of  industrial  and  social  unrest  and  of  the 
hardships  connected  with  the  fluctuating  cost  of  living. 
These  variations  in  living  cost  result  in  the  adjustments 
of  the  mode  of  living  to  income,  made  necessary  when 
changing  from  one  price  level  to  another. 

It  is,  as  stated,  the  object  of  almost  all  banking  and 
monetary  reforms  to  do  away  with  these  fluctuations  in 
the  general  level  of  prices.  It  is  evident  that  the  only 
way  to  accomplish  this  object  is  by  an  arrangement  so 
that  the  purchasing  power  of  the  dollar  shall  remain 
uniform.  But  this  end  will  never  be  accomplished  tmtil 
control  of  the  volume  of  the  medium  of  exchange  is 
taken  out  of  the  private  hands  of  the  banker,  for  it  i3 
owing  to  his  control  that  the  volume  of  the  medium  of 
exchange  does  not  vary  in  accordance  with  the  volume  of 
business.  One  reason  for  this  lack  of  elasticity  in  our 
medium  is  because  the  private  control  of  the  banker 
always  results  in  a  tendency  toward  contraction. 

In  order  to  demonstrate  this  fact  it  will  be  necessary 
first  of  all  to  show  clearly  what  we  mean  by  the  terms 
contraction    and   expansion.      This    can   be   most   easily 


THE  INDUSTRIAL  STRAIT- JACKET        49 

done  hy  having  recourse  once  more  to  our  analogy  to  the 
railroad. 

Contraction  of  the  medium  of  transportation  means 
that  there  are  not  enough  railroad  facilities  to  carry  on 
the  business  of  transportation.  This  situation  occurred 
in  Mexico  during  the  Carranza  regime  as  related  in  the 
last  chapter.  The  result  of  this  contraction  in  railroad 
facilities  was  a  stagnation  of  business  in  all  regions 
affected.  In  agricultural  districts  there  were  low  prices 
for  food  and  high  prices  for  everything  else.  In  the 
mining  districts  the  mine  products^  if  they  had  been  in 
demand  at  all  in  those  districts,  would  have  been  very 
low,  but  the  prices  of  all  other  commodities  which  had 
to  be  brought  into  the  district  by  railroads  were  very 
high.  As  these  other  commodities  included  food,  many 
people  starved  owing  to  an  insufficient  supply  of  food. 

Contraction  of  the  medium  of  exchange  has  the  same 
result.  It  implies  an  insufficiency  of  the  medium  to 
properly  carry  on  the  volume  of  business  offered.  A  very 
serious  result  of  such  a  condition  will  be  described  in 
the  chapter  on  "National  Efficiency"  where  the  case  of 
China  will  be  discussed. 

Referring  again  to  an  illustration  in  the  last  chapter 
we  saw  that  if  the  farmer  could  not  get  a  loan,  his  pro- 
jected improvement  could  not  be  carried  out.  The  refusal 
of  the  loan  was  an  act  contracting  the  medium  of  ex- 
change. Such  acts  tend  towards  business  stagnation, 
for  if  many  are  placed  in  the  same  position  as  the 
farmer,  so  that  they  are  prevented  from  carrying  out 
the  business  ventures  they  have  contemplated,  business 
will  stagnate. 


50  THE  STRANGLE  HOLD 

Juat  such  a  condition  happened  in  Mexico  owing  to 
lack  of  transportation  facilities — stagnation  of  business. 
And  it  is  found  to  happen  always  as  a  result  of  con- 
traction of  the  medium  of  exchange. 

The  only  way  industry  can  be  carried  on  is  by  means 
of  the  medium  of  exchange,  so  with  every  expansion  of 
industry  the  demand  for  credit  becomes  greater  and  im- 
less  its  volume  increases  in  the  same  proportion,  busi- 
ness lags,  industry  hesitates  and  hard  times  and  want 
follow  as  a  result. 

An  increase  in  the  demand  for  credit  raises  its  price, 
or  in  other  words,  the  discount  or  interest  rates  go  up, 
and  they  continue  to  go  up  until  they  get  so  high  credit 
cannot  be  used  profitably.  Contraction  then  results, 
which,  of  course,  stops  business  expansion.  This  condi- 
tion always  means  curtailment  of  production,  resulting 
in  curtailed  employment  and  reduced  wages.  In  this 
way  any  movement  toward  increased  production  results 
finally  in  the  contraction  of  the  medium  by  means  of 
which  business  is  carried  on. 

Several  reasons  will  be  noted  why,  under  private  con- 
trol, the  medium  cannot  expand  to  keep  pace  with  the 
productive  energy  of  all  the  people,  so  the  final  result  of 
private  control  is  that  prosperity  must  invariably  be 
followed  by  what  we  call  "hard  times." 

Expansion,  or  inflation,  of  the  medium  of  transporta- 
tion and  of  the  medium  of  exchange  are  the  opposites 
of  contraction,  and  the  results  of  expansion  in  both  cases 
are  similarly  analogous. 

If  more  transportation  facilities  are  supplied  to  a  com- 
munity than  required,  they  will  not  all  be  used  until  the 


THE  INDUSTRIAL  STRAIT- JACKET       51 

community  has  had  a  chance  to  grow  up  to  them.  Mean- 
while, however,  such  a  condition  would  have  the  effect 
of  lowering  transportation  rates,  which  would  be  a  bid 
for  greater  production  and  greater  consumption — that  is 
— a  better  standard  of  living. 

The  same  is  true  of  the  medium  of  exchange. 

The  community  can  use  just  so  much  credit,  and  if 
more  is  offered  it  will  drive  down  interest  rates ;  which 
in  turn  will  invite  increased  business  actiWty. 

Inflation,  then,  is  in  itself  simply  a  bid  for  increased 
energy  of  production  and  increased  comforts  and  hap- 
piness for  the  members  of  the  community. 

These  results  are  certainly  not  evil.  But  with  our  pres- 
ent system  the  indirect  results  of  inflation  are  bad,  for 
due  to  private  control  of  bank  credit,  inflation  is  invari- 
ably followed  by  a  period  of  deflation,  or  contraction. 

The  sequence  of  the  phenomena  of  inflation  and  defla- 
tion can  easily  be  seen. 

Industry  expands  only  by  means  of  an  expansion  in 
the  medium  of  exchange.  When  the  medium  expands, 
that  is  to  say,  is  inflated,  industry  expands  the  more 
easily.  But  production  soon  outstrips  the  expansion  of 
the  medium  and  demands  further  expansion  in  propor- 
tion to  the  increased  production.  If  this  fails  we  have 
once  more  the  sequence  of  increased  demand  for  credit 
increasing  the  interest  or  discount  rates  until  they  are 
so  high  that  credit  cannot  be  profitably  used,  and  so  we 
come  down  again  to  a  period  of  lowering  prices  and  hard 
times. 

Under  private  control  of  the  railroads  we  had  the  same 
result. 


52  THE  STRANGLE  HOLD 

Great  demand  for  transportation  service  would  raise 
the  rates  until  the  high  rates  would  curtail  shipment. 

The  reason  just  referred  to  is  a  very  potent  one 
■why,  under  the  present  system  of  private  control  of  bank 
credit,  there  is  always  a  tendency  towards  contraction — 
that  is,  there  is  always  a  tendency  toward  deflation  or 
restriction  of  credit  and  hence  against  the  expansion  of 
industry. 

We  saw  the  result  of  this  in  the  very  beginning  of 
this  book,  in  the  case  of  the  automobile  dealers,  who  are 
now  unable  to  obtain  the  credit  necessary  to  carry  on 
their  business. 

The  private  control  of  the  medium  of  exchange  is  a 
constant  bid  for  credit  restrictions  which  invariably 
brings  on  recurring  periods  of  hard  times,  and  until  the 
medium  of  exchange  is  freed  from  private  control,  the 
dominating  private  interests  will  continue  periodically 
to  disrupt  and  oppress  business  through  the  curtailment 
of  bank  loans. 

It  may  seem  to  be  a  matter  of  no  particular  interest 
that  a  business  man  a  thousand  miles  away  cannot  get 
a  loan  from  the  bank,  or  that  the  bank  will  no  longer  dis- 
count the  automobile  dealers'  paper.  However,  when  a 
large  number  of  such  loans  are  refused,  the  effect  on 
the  private  business  man  whose  loan  is  refused  is  not  the 
only  effect. 

A  merchant  for  instance  fails  to  order  goods  because 
the  banker  will  not  grant  him  proper  credit  facilities  for 
handling  them;  the  manufacturer  then  curtails  produc- 
tion because  of  the  lack  of  orders;  in  consequence  of 
which  working-men  are  thrown  out  of  employment.  Hard 


THE  INDUSTRIAL  STRAIT- JACKET        53 

times  for  industry  and  business  as  a  whole  are  the  result. 

It  is  now  quite  clear  that  the  grant  or  denial  of  a  bank 
loan  is  not  a  private  affair  between  the  banker  and  the 
borrower^  since  the  result  directly  affects  all  business 
activity  and  the  prosperity  of  the  whole  community.  For 
just  so  long  as  we  allow  the  volume  of  the  medium  of 
exchange  to  be  controlled  by  a  few  men  we  are  not  only 
permitting  those  men  to  dictate  our  individual  success 
but  to  control  all  the  wheels  of  industry. 

One  reason,  then,  for  the  bad  effect  of  private  control 
over  the  medium  of  exchange  is  due  to  the  fact  that  the 
banker  invariably  tends  to  cause  contraction  in  the  vol- 
ume of  bank  credit.  This  tendency  springs  from  three 
separate  causes. 

The  iSrst  reason  is  that  it  is  to  the  interest  of  those  in 
control  of  the  banks  to  contract  the  medium  of  exchange 
for,  as  we  have  seen,  a  contraction  in  the  exchange  me- 
dium relative  to  the  volume  of  business  results  in  a 
lowering  of  prices:  for  one  dollar  must  now  do  more 
work  than  it  did  before. 

The  creditor  interests  are  the  ones  in  control  of  the 
banks,  and  since  their  loans  are  expressed  in  terms  of 
dollars,  it  is  to  their  interest  to  make  those  dollars  worth 
as  much  as  possible  to  them.  That  is,  they  want  the  dol- 
lar to  buy  as  much  as  possible — in  other  words,  they 
desire  low  prices. 

If  the  price  of  wheat  is  one  dollar  a  bushel,  the  cred- 
itor, who  is  in  control  of  the  bank,  will  get  twice  as  much 
wheat  for  his  money  as  he  would  if  the  price  of  wheat 
were  two  dollars  a  bushel.  Therefore,  it  is  to  the  bank- 
er's interest  to  curtail  the  medium  of  exchange,  since  such 


54  THE  STRANGLE  HOLD 

curtailment  lowers  prices  of  commodities  and  thereby  in- 
creases the  purchasing  power  of  his  dollars. 

Not  alone  does  it  accomplish  that  purpose  but  it  in- 
creases the  interest  or  discount  rate  he  charges  for  their 
use,  so  those  who  control  the  banks  not  only  increase 
their  fortunes  but  their  incomes  at  even  a  greater  rate  by 
a  process  which  decreases  business  and  increases  debt. 

The  present  system  causes  producers  and  debtors  to 
suffer  while  the  non-producing  creditors  may  fatten. 

The  second  reason  for  contraction  is  due  to  the  bank- 
er's timidity,  and  his  timidity  is  largely  due  to  the  fact 
that  gold  is  at  present  the  only  commodity  which  is  sup- 
posed to  form  a  basis  for  the  credit  which  is  our  medium 
of  exchange. 

The  banker,  as  we  have  seen,  has  to  keep  a  reserve 
behind  his  deposits,  and  this  reserve  must  either  be  in  the 
form  of  gold  or  other  money  supposed  to  be  redeem- 
able in  gold.  On  this  account  the  banker  is  interested  in 
the  country's  gold  supply,  and  consequently  whenever 
gold  is  shipped  out  of  the  country  in  any  considerable 
amount  or  prosperity  makes  a  demand  for  the  expansion 
of  credit  the  banker  gets  into  a  state  of  panic  and  begins 
to  refuse  and  to  call  loans. 

The  irony  of  the  situation  is  that  every  naove  he  makes 
to  escape  an  approaching  imaginary  financial  storm 
hastens  the  approach  of  a  real  one  and  adds  to  its  fury 
when  it  breaks.  His  fear  of  a  possible  panic  produces 
genuine  panic. 

Such  panics  occurred  on  an  average  of  once  every  ten 
years  during  the  eighty  years  preceding  1907,  but  in 
spite  of  their  frequency  they  were  not  understood. 


THE  INDUSTRIAL  STRAIT- JACKET        55 

The  banker,  as  we  have  seen^  began  to  refuse  and  to 
call  loans,  fearing  an  impending  calamity.  This  reduc- 
tion of  loans  meant  a  shrinking  in  the  volume  of  the 
medium  of  exchange.  As  a  result  money  became  tight, 
trade  decreased,  prices  fell,  production  diminished  and 
the  value  of  the  security  behind  the  still  outstanding 
loans  shrunk.  In  consequence  of  this  condition  the  banker 
became  still  more  afraid. 

He  refused  loans  in  the  first  place  because  of  a  be- 
lief that  some  change  was  going  to  take  place  in  the 
financial  world  that  would  make  it  unwise  for  him  to 
extend  credit.  He  became  still  more  afraid  when  he 
saw  the  result  of  his  action  and  then  he  began  to  call 
more  loans.  This  action  caused  still  tighter  money, 
greater  stringency,  and  a  further  decline  in  prices,  se- 
curities, and  wages. 

Then  there  followed  business  failures,  caused  by  the 
restriction  of  credit.  Bank  runs  resulted,  bringing  in 
their  train  bank  failures,  and  the  commercial  world  was 
prostrated  in  a  delirium  of  fear.  All  of  which  resulted 
from  the  banker  being  afraid  of  his  own  shadow. 

The  Federal  Reserve  System  now  tends  to  protect  the 
banks  so  that  the  financial  panics  that  occurred  every  ten 
years  up  to  1907  seem  to  be  overcome,  but  it  does  not 
protect  the  rest  of  the  community  from  loss  because  of 
falling  prices  due  to  deflation  nor  does  it  remove  the 
inevitability  of  periods  of  contraction,  business  stagna- 
tion, and  industrial  turmoil  following  prosperity. 

In  the  chapter  devoted  to  the  "Federal  Reserve  Sys- 
tem" an  entirely  new  light  will  be  thrown  on  that  much 
misunderstood   institution.      Periods   of  depression  will 


56  THE  STRANGLE  HOLD 

continue  to  follow  periods  of  prosperity  until  their  cause, 
the  private  control  of  bank  credit,  is  removed. 

In  former  years  after  the  decennial  panic  just  de- 
scribed had  finally  exhausted  itself,  confidence  would 
begin  to  return,  and  credit  would  slowly  become  read- 
justed. Soup  kitchens  would  close,  and  those  who  had 
the  courage  and  health  to  start  life  anew  would  get  to 
work,  and  again  deposit  their  savings  with  the  banks. 

And  then  the  banker,  ignorant  of  the  fact  that  he  was 
the  cause  of  the  panic,  would  assert  that  it  was  the  effect 
of  tariff  tinkering,  politics  interfering  with  big  business, 
over  production,  overspeculation,  or  anything  else  he  had 
a  particular  aversion  for.  And  the  public  thought  "Yes, 
I  guess  that  was  it,"  for  the  banker  ought  to  know. 
While  the  fact  was,  as  we  have  seen,  that  the  banker  was 
the  unconscious  cause  of  the  whole  trouble. 

A  closer  examination  of  the  situation  will  disclose  yet 
another  fact,  namely,  that  he  just  as  unconsciously  over- 
ruled the  will  of  the  people. 

For  the  purpose  of  analysis,  we  will  take  a  cause  which 
was  formerly  used  as  a  scapegoat  more  often,  perhaps, 
than  any  other — ^tariff  changes  due  to  change  in  national 
administration. 

This  change  in  administration,  could  come  about  only 
by  means  of  more  votes  being  cast  for  low  tariff  prin- 
ciples than  for  high  tariff;  that  is,  more  than  fifty  per 
cent  of  the  voters  of  the  country  must  have  expressed  a 
desire  for  such  a  change  in  the  government  policy.  But 
when  the  change  in  tariff  was  made  or  threatened, 
the  banker  began  to  get  pessimistic  as  to  its  effect  on 
business. 


THE  INDUSTRIAL  STRAIT-JACKET        57 

He  told  his  fears  to  customers  applying  for  loans 
and  advised  them  to  wait  a  little  to  see  how  the  change 
was  going  to  affect  them  before  they  bought  more  goods 
or  enlarged  their  business. 

Although  a  customer  might  disagree  entirely  with  the 
banker  as  to  the  effect  of  the  legislation,  the  important 
fact  remained  that  the  customer  did  not  get  his  loan, 
because  loans  were,  and  still  are,  issued  solely  on  the 
banker's  judgment. 

A  difference  in  opinion  between  the  banker  and  more 
than  fifty  per  cent  of  the  voters  of  the  country  had  thus 
denied  to  a  responsible  business  man  the  right  to  use  a 
needed  amount  of  medium  of  exchange.  He  could  not 
obtain  the  goods  he  intended  to  buy  or  increase  his 
business. 

The  wheels  of  commerce  were  stopped  to  such  an  ex- 
tent that  this  stoppage  was  reflected  back  through  the 
whole  complicated  fabric  of  business.  This  condition 
forced  other  business  men  to  curtail  business  and  cancel 
orders,  creating  what  economists  now  describe  as  a 
"Buyers'  Strike."  It  required  comparatively  few  set- 
backs like  this  to  shock  the  commercial  structure  to  its 
foundation. 

It  should  be  carefully  noted  that  his  refusal  of  the  use 
of  the  exchange  medium  was  not  the  effect  of  the  judg- 
ment of  the  banker,  but  the  effect  of  his  timidity.  Thus 
it  is  seen  that  the  banker's  fear  of  impending  disaster 
following  a  political  change  not  only  prevented  the  pro- 
posed or  enacted  tariff  change  from  having  a  fair  trial, 
but  it  falsely  charged  politics  with  causing  panic  or 
hard  times. 


58  THE  STRANGLE  HOLD 

It  could  hardly  be  more  certain  that  through  control 
of  the  medium  of  exchange,  the  banker  thus  nulified 
the  will  of  the  people  and  refuted  the  claim  that  our 
government  is  one  of  the  people  by  the  people  and  for 
the  people. 

Now  we  have  seen  two  reasons  why  private  control  of 
bank  credit  will  always  tend  toward  contraction  of  the 
medium  of  exchange  with  its  bad  results. 

These  reasons  are,  in  the  first  place,  the  fact  that  it  is 
to  the  banker's  interest  to  curtail  the  medium  of  ex- 
change, thereby  lowering  prices  and  making  the  debts 
owing  him  the  more  valuable,  as  well  as  increasing  his 
income  by  raising  the  interest  rate. 

In  the  second  place,  on  account  of  the  banker's  tim- 
idity, causing  curtailment  of  loans  as  we  have  seen 
which  caused  business  depression,  and  before  the  pass- 
ing of  the  Federal  Reserve  Act,  also  caused  periodi- 
cally recurring  financial  panics. 

But  there  is  still  a  third  reason  why  our  medium  of  ex- 
change, as  it  is  constituted  today,  will  invariably  tend  to 
contract  when  prosperity  increases  the  demand  for  it  and 
this  reason  hinges  upon  two  circumstances. 

The  one  is  the  gold  standard,  by  which  gold  forms 
the  basis  of  our'  medium  of  exchange,  coupled  with  the 
fact  that  the  price  of  gold  is  fixed  at  $20.67  per  fine 
ounce.  That  is,  the  amount  of  gold  worth  one  dollar 
is  fixed  by  law  at  23.22  grains  which  amounts  to  the 
same  thing.  The  second  circumstance  is  the  increas- 
ing difficulty  in  the  production  of  gold. 

Gold  is  a  commodity  in  all  respects  similar  to  any  other 
commodity,  with  the  exception  that  its  price  is  fixed  by 


THE  INDUSTRIAL  STRAIT- JACKET        59 

law.  It  has  to  be  produced,  by  the  process  of  mining, 
and  it  has  a  varying  cost  of  production. 

As  with  every  other  commodity,  when  the  cost  of  pro- 
duction increases,  the  price  should  also  increase.  Take 
coal,  for  instance.  As  mines  become  gradually  exhausted, 
and  the  producers  have  to  dig  deeper  and  deeper,  the 
cost  of  producing  coal  increases.  Then,  unless  other 
sources  of  coal  are  found,  where  the  coal  is  more  easily 
and  more  cheaply  obtainable,  the  price  will  increase. 

When  the  cost  of  producing  gold  increases,  the  same 
thing  should  happen — the  price  of  gold  should  increase. 
But  we  see  that  the  price  of  gold  is  set  by  law,  which 
says  that  23.22  grains  shall  be  worth  one  dollar  by 
saying  that  the  dollar  shall  consist  of  that  amount  of 
pure  gold.  The  law  does  not  set  the  price  of  any  other 
commodity,  it  does  not  say,  for  instance,  how  many  dol- 
lars a  pair  of  shoes  are  worth.  But  it  does  fix  the  price 
of  gold. 

Now  bank  reserve  requirements  make  a  reserve  of  gold 
behind  paper  money  and,  therefore,  of  deposits  neces- 
sary. The  banker  must  keep  his  reserve  either  in  money, 
or  in  credit  supposed  to  be  redeemable  in  gold.  Con- 
sequently, the  amount  of  gold  held  restricts  the  amount 
of  the  medium  of  exchange  that  can  be  issued. 

As  industry  expands,  the  medium  of  exchange  should 
expand,  or  we  will  have  contraction,  with  its  evil  con- 
sequences. But  the  expansion  of  the  medium  of  ex- 
change is  limited  by  the  amount  of  gold  and  gold  is 
limited  by  production. 

The  cost  of  gold  increases  with  the  cost  of  mining 
and  milling. 


60  THE  STRANGLE  HOLD 

Consequently  if  prosperity  raises  the  price  of  labor 
and  the  commodities  entering  into  gold  production  then 
production  will  decrease  because  the  price  of  gold  is 
fixed  by  law  and  cannot  increase  with  the  cost  of  pro- 
duction. 

Here  once  more  we  see  an  inevitable  tendency  towards 
contraction. 

But  there  is  a  paradox  here,  too,  which  shows  that 
not  only  because  the  price  of  gold  is  fixed,  but  also 
because  gold  alone  is  used  as  the  basis  for  our  medium 
of  exchange,  we  have  this  tendency  toward  contraction. 

Expansion  of  industry  under  our  present  financial  sys- 
tem invariably  means  a  period  of  rising  prices.  Ex- 
pressed in  gold,  it  means  a  fall  in  the  price  of  gold. 
And  we  have  seen  that  in  order  to  increase  the  volume 
of  the  medium  of  exchange  so  as  to  keep  pace  with  in- 
creased business  it  was  necessary  to  increase  the  amount 
of  gold  produced. 

As  with  other  commodities,  this  can  be  done  only  by 
increasing  the  price  of  gold  as  its  cost  of  production  in- 
creases. Unless  the  price  increase  keeps  pace  \vith  the 
cost  increase  gold  production  decreases  and  thus  com- 
pells  contraction  which  strangles  business. 

Could  anything  be  more  absurd  than  a  system  which 
causes  prosperity  to  check  prosperity? 

Such  a  system  is  on  a  par  with  the  building  of  an  auto- 
mobile and  putting  the  reverse  gear  where  the  high  speed 
should  be.  Every  time  the  gears  are  thrown  into  high 
the  machine  backs  up. 

Even  the  slightest  acquaintance  with  machinery  must 
show   that    such   an    arrangement   would   throw    a    very 


THE  INDUSTRIAL  STRAIT- JACKET        61 

great  strain  on  the  whole  mechanism  and  but  little  re- 
flection is  required  to  show  that  our  financial  system  is 
so  arranged  that  it  is  an  automatic  reverse  on  our  indus- 
trial and  business  activities.  Consequently  the  whole  so- 
cial system  is  shocked  instead  of  benefited  by  a  wave  of 
prosperity.  The  bad  eiFect  which  such  an  arrangement 
has  on  the  system  is  sho^vn  in  industrial  turmoil  and 
social  unrest. 

It  begins  to  be  clear  that  there  is  something  radically 
wrong  with  the  gold  standard.  Further  consideration 
in  the  chapter  on  "The  Gold  Standard"  will  strengthen 
this  conclusion. 

We  have  seen  that  the  control  of  the  medium  of  ex- 
change is  in  the  hands  of  the  banks  and  banks  are  largely 
controlled  by  the  "vested  interests,"  or  non-producing 
creditors  to  whose  advantage  it  is  that  prices  shall  fall. 
For  this  reason  the  result  of  private  control  is  always  a 
tendency  toward  contraction  of  the  medium  of  exchange. 
And  we  have  also  seen  that  the  gold  standard  aids  in 
that  tendency. 

We  must  conclude  then  that  the  gold  standard  is  the 
ally  of  the  vested  interests,  since  its  tendency  is  in  the 
direction  most  profitable  to  those  interests. 

The  gold  standard  and  the  "vested  interests"  are  but 
phases  of  the  faiilt  that  is  at  the  bottom  of  our  trouble. 
Private  control  of  the  medium  of  exchange  is  the  real 
fault.  Basing  our  medium  of  exchange  upon  one  com- 
modity, gold,  makes  the  private  control  of  bank  credit 
still  more  efi'ective,  in  as  much  as  the  bankers  are  en- 
abled to  gain  control  also  of  the  gold.  And  so  long  as 
our  medium  of  exchange  is  controlled  by  a  gold  reserve 


62  THE  STRANGLE  HOLD 

and  is  in  the  hands  of  private  interests,  prices  and 
wages  must  come  down  and  debts  go  up  whenever  the 
gold  production  falls  off.  It  is  an  automatic  break  on 
national  efficiency  and  personal  prosperity. 

Although  this  defect  is  but  another  phase  of  the  gen- 
eral fault,  and  serves  only  to  intensify  the  evil  effects  of 
private  control,  it  is,  nevertheless  worthy  of  special  study. 
The  gold  standard  idea,  through  a  fallacy,  is  deep  rooted 
and  while  of  no  consequence  in  our  remedy  it  should  be 
understood  just  because  it  is  fallacious. 

The  next  step,  therefore,  will  be  to  study  the  gold 
standard,  not  exhaustively,  but  only  to  see  how  it  arose, 
and  to  note  some  of  its  present  deficiencies,  and  also  to 
understand  how  it  adds  to  the  evils  of  private  control  of 
our  real  medium  of  exchange — bank  credit. 


CHAPTER  V 
"FROZEN  CREDITS" 

IN  TRACING  the  development  of  our  present  medium 
of  exchange,  we  saw  how,  for  purposes  of  greater 
convenience,  one  or  two  commodities  came  to  be  used 
almost  exchisively.  Gold  and  silver  had  the  advantages 
of  possessing  great  value  in  small  bulk;  they  were, 
therefore,  convenient  to  carry.  Their  scarcity  also  gave 
them  a  more  or  less  steady  value,  and  so  they  came  to  be 
selected  instead  of  other  commodities  as  the  medium  to 
be  used  in  changing  the  ownership  of  goods. 

Gold  possesses,  even  to  a  greater  extent  than  silver, 
the  qualities  enumerated  above  and  so  naturally  became 
the  more  important  medium,  or  money,  while  silver  to  a 
great  extend  lost  this  dignity. 

Both  of  these  steps  were  part  of  a  natural  develop- 
ment and  each  was  an  improvement  over  the  former.  By 
the  use  of  something  with  a  fairly  definite  value  as  a 
medium,  a  much  greater  amount  of  trading  and  commerce 
could  be  carried  on  than  under  the  cumbrous  form  of 
direct  barter,  or  by  the  use  of  a  medium  of  uncertain 
value.  But  a  time  came  when  even  this  improved  method 
of  transacting  business  became  inadequate  for  the  needs 
of  commerce. 

The  amount  of  the  commodity  was  limited.  Gold  does 
not  increase  as  population  increases  or  as  business  activ- 
ity increases,  but  only  through  the  discovery  of  new 
sources  or  of  better  methods  of  production. 

63 


64.  THE  STRANGLE  HOLD 

Consequently,  since  its  use  was  necessary  in  order  to 
effectuate  the  exchange  of  goods  and  services,  just  as 
rolling-stock  is  necessary  for  transportation,  increased 
business  called  for  more  gold.  This  increased  demand 
for  gold  as  a  medium  for  carrying  on  business  resulted 
in  the  community  bidding  higher  for  its  use. 

Thus,  a  man  who  had  one  thousand  bushels  of  wheat 
which  he  wanted  to  trade  for  improvements,  clothing,  etc., 
would  offer  more  and  more  wheat  for  the  use  of  the 
medium  of  exchange  according  to  its  scarcity  and  accord- 
ing to  how  pressing  were  his  demands  for  the  things  he 
wanted  or  the  debts  he  had  to  pay. 

In  other  words,  if  the  supply  of  gold  were  not  in- 
creased to  meet  the  needs  of  an  increased  volume  of 
business,  prices  would  keep  going  down  until  business 
stagnated  and  production  fell  off  to  such  an  extent  that 
the  community  suffered. 

As  industry  increased,  then,  a  greater  amount  of  the 
medium  of  exchange  became  necessary.  The  supply  of 
gold  did  not  increase  with  sufficient  rapidity  to  supply 
this  need,  and  so  some  other  medium  had  to  be  used  in 
addition  to  gold.  Credit  arose  to  meet  this  necessity,  and 
credit  has  since  then  grown  and  expanded  until  today 
it  forms  almost  the  entire  amount  of  our  medium  of  ex- 
change. 

This  use  of  credit  was  a  natural  development,  and  as 
in  the  case  of  those  mediums  that  preceded  it,  one 
that  was  an  improvement  over  former  conditions.  Per- 
haps for  the  reason  that  it  was  a  natural  step  it  did  not 
take  the  form  that  would  have  been  most  suitable.  At 
any  rate  from  the  defects  already  mentioned  it  would 


"FROZEN  CREDITS"  66 

seem  that  once  more  we  have  come  to  such  a  stage  in 
industrial  progress  that  a  further  improvement  is  nec- 
essary. 

This  does  not  mean  that  something  other  than  credit 
is  required  to  serve  as  a  medium  of  exchange.  Nor  does 
it  mean  that  we  must  discard  gold.  V/hat  is  necessary  is 
to  put  credit  on  a  broader  basis.  Increase  its  carrying 
capacity  just  as  we  increased  the  carrying  capacity  of 
our  railroads  to  keep  pace  with  our  idustrial  develop- 
ment. Reorganize  it,  bringing  out  its  immense  possibil- 
ities. Once  this  has  been  done,  it  will  become  an  adequate 
instrument  of  exchange.  One  so  perfect,  in  fact,  that  it 
will  satisfy  all  the  demands  of  trade  and  industry. 

In  order  to  broaden  the  basis  of  our  credit  and  accom- 
plish the  desired  result,  it  will  merely  be  necessary  to  put 
bank  credit  upon  a  basis  of  truth.  Its  evolution  shows 
it  developed  upon  a  false  basis  and  it  still  rests  on  a 
promise  of  gold  redemption  which  we  all  know  cannot 
be  fulfilled.     Let  us  see  what  this  statement  means. 

We  have  seen  that  the  earliest  development  of  credit 
or  rather  bank  credit,  as  we  use  it,  was  in  the  hands  of 
the  goldsmiths.  It  started  when  they  made  a  practice  of 
accepting  deposits  of  gold  and  silver  and  giving  receipts 
therefore.  These  receipts,  on  account  of  their  ready  con- 
vertibility into  gold,  became  negotiable.  In  other  words, 
these  notes  or  receipts  began  to  circulate  as  money,  be- 
cause of  the  goldsmith's  reputation  for  reliability  in  pay- 
ing gold  on  demand  for  his  notes. 

As  a  result  of  this  reputation,  the  goldsmith  found 
that  the  people,  for  reasons  of  convenience,  would  rather 
have  his  notes  than  metal  money. 


66  THE  STRANGLE  HOLD 

Soon  he  accumulated  a  great  store  of  the  precious 
metals  that  was  seldom  called  for.  The  better  his  reputa- 
tion for  prompt  payment,  the  less  frequently  he  was 
asked  to  pay.  So  he  began  deliberately  to  trade  on  this 
public  confidence,  and  sell  his  credit  for  use  as  money. 

As  long  as  he  could  retain  the  confidence  of  the  people 
by  always  paying  on  demand,  there  was  no  limit  to  the 
receipts  that  he  might  issue. 

Thus  we  see  the  development  of  a  practice  which  con- 
tinues today  and  which  causes  the  basic  defect  in  our 
present  financial  system.  The  goldsmith's  deception  is 
still  continued  by  our  banking  system  and  it  will  soon 
be  shown  how  it  causes  our  trouble. 

The  goldsmith  issued  credit,  pretending  it  was  backed 
up  by  gold.  He  gave  a  receipt  for  gold  which  had  not 
been  deposited. 

Although,  on  accovmt  of  the  necessity  for  some  im- 
provement, the  growth  of  credit  in  this  way  did  some 
good,  nevertheless  the  fact  that  it  is  founded  upon  decep- 
tion has  hampered  it  and  kept  it  from  functioning  as 
perfectly  as  it  will  when  put  upon  a  foundation  of  truth. 

Banknotes  and  government  paper  money  form  one 
part  of  our  credit  today.  They  are  promises  to  pay  in 
gold.  Yet,  as  will  be  shown  subsequently,  it  would  be 
physically  impossible  to  fulfill  this  promise,  for  the 
simple  reason  that  there  is  not  enough  gold  obtainable 
to  do  so.  This  form  of  credit  is,  therefore,  based  upon  a 
fallacy. 

Similarly  with  bank  credit.  The  fallacy  in  this  case 
takes  a  somewhat  difi'erent  form,  but  in  effect  it  is  the 
same.     The  depositor  thinks  that  he  is  handing  money 


"FROZEN  CREDITS"  67- 

to  the  banker  which  will  be  kept  for  him.  The  borrower 
thinks  he  is  borrowing  money  from  the  bank.  Both  of 
these  ideas  are  incorrect. 

When  a  customer  deposits  money  with  a  bank,  the 
banker  does  not  become  a  trustee  for  this  money,  prom- 
ising to  take  care  of  it  for  the  customer.  The  money 
deposited  becomes  the  property  of  the  bank,  in  exchange 
for  which  the  bank  gives  its  promise  to  pay  back  that 
amount  on  demand. 

As  we  have  seen  in  a  previous  chapter,  the  banker  uses 
this  money  just  as  the  goldsmith  did.  He  holds  it  and 
uses  it  to  pay  whenever  he  is  called  upon  to  pay.  As 
long  as  he  can  pay  when  demand  is  made  his  promise 
to  pay  is  good  so  he  trades  his  promise  to  pay  to  those 
who  want  to  borrow  in  return  for  their  promise  to  pay 
him. 

It  has  been  shown  that  these  bank  "loans"  are  made  by 
giving  the  borrower  credit  for  a  "deposit."  The  borrower 
has  made  no  deposit  but  has  simply  traded  his  promises 
to  pay  in  the  shape  of  a  promissory  note  for  the  bank- 
ers promise  to  pay  in  the  shape  of  a  credit  on  the  bank's 
books. 

The  very  fact  that  when  the  banker  makes  a  loan  he 
gives  the  borrower  credit  for  a  deposit  the  same  as  he 
gives  the  depositor  credit  shows  that  the  banker  is  not 
a  trustee  for  money  deposited  but  is  a  debtor  of  the 
depositor. 

Like  everyone  else  he  will  pay  when  he  can  and  the 
system  is  framed  for  the  purpose  of  making  the  cus- 
tomer think  that  he  can  always  pay. 

The  object  of  the  Federal  Reserve  System,  explained 


68  THE  STRANGLE  HOLD 

later,  is  to  increase  credit  by  increasing  public  confidence 
in  tbe  banks.  Its  purpose  is  to  keep  the  customer 
believing  the  banker  can  pay.  By  so  doing  the  system 
prevents  too  many  customers  from  demanding  payment 
at  the  same  time  and  so  prevents  bank  runs  and  panics. 

Just  as  in  former  times  people  accepted  the  gold- 
smith's receipts  as  money  because  they  thought  that  there 
was  an  equivalent  amount  of  gold  behind  them,  so  today 
people  accept  banknotes  and  other  bank  credits  because 
they  think  that  they  can  get  money  or  gold  in  exchange 
for  them  if  they  so  desire. 

Now  it  is  true  that  during  normal  times,  when  there  is 
little  demand  for  gold,  it  is  possible  to  get  both  bank 
credit  and  paper  money  redeemed  in  gold.  But  in  ab- 
normal times  and  whenever  there  has  been  really  a  de- 
mand for  money,  when  people  most  urgently  need  gold, 
then  they  could  not  get  it.  And  the  reason  why  they 
were  presented  from  having  their  notes  and  checks  re- 
deemed in  gold  was  because  there  was  not  enough  gold 
to  supply  the  demand. 

The  promise  to  redeem  in  gold  still  continues  while 
fulfillment  of  the  promise  has  become  more  and  more  im- 
possible until  now  it  is  little  less  than  a  joke.  The  extent 
to  which  tliis  joke  has  been  carried  by  a  complicated 
reserve  system  will  be  pointed  out  later.  The  fact  that 
there  is  not  enough  gold  to  fulfill  the  promises  to  pay 
in  gold  is  so  well  known  to  every  one  that  were  it  not 
that  the  human  race  has  worshiped  this  false  god 
gold  for  so  many  generations  the  mere  statement  that 
the  promise  is  false  would  be  sufficient.  But  the  promise 
still  persists  and  what  is  more  strange  it  is  accepted  in 


-"FROZEN  CREDITS"  69 

spite  of  the  many,  many  times  that  it  has  been  proved 
to  be  false.  We  still  give  it  credence  and  use  it  as  the 
basis  of  our  financial  system. 

Figures  serve  only  to  confuse  and  there  are  more 
potent  proofs  than  the  mere  recital  of  figures  that  the 
gold  redemption  promise  is  false.  Conclusive  proof  is 
based  upon  what  everybody  knows  to  be  true — many, 
indeed,  from  bitter  experience.  This  proof  is  the  evi- 
dence afforded  by  the  panics  that  have  so  often  occurred, 
during  which  payment  in  gold  was  demanded  but  refused. 

Other  evidence  of  the  fallacy  of  the  gold  standard  is 
found  in  every  issue  of  clearing  house  loan  certificates 
that  has  been  made. 

Clearing  house  loan  certificates  were  first  issued 
in  1860,  owing  to  a  demand  on  the  banks  for  money. 
Subsequent  issues  occurred  in  1861,  1863,  1864,  1873, 
and  in  1893.  In  recent  years  there  have  been  wide  ex- 
tensions of  their  use. 

In  1907  industry  had  outgrown  the  currency  system, 
and  to  supply  the  need,  over  one  hundred  millions  of  cer- 
tificates were  issued  against  four  hundred  and  fifty  mil- 
lions of  collateral.  These  were  in  public  circulation  from 
October,  1907,  to  January,  1908.  In  1914  over  two  hun- 
dred millions  of  dollars  in  clearing  house  certificates 
were  issued,  and  got  into  public  circulation,  in  addition 
to  other  emergency  money  issued  by  the  National  Cur- 
rency Association. 

We  will  discuss  here  the  issues  that  got  into  circula- 
tion, because  they  afford  the  most  complete  proof  that 
the  gold  standard,  with  its  promise  to  redeem  credit  in 
gold,  is  fallacious. 


70  THE  STRANGLE  HOLD 

From  the  Comptroller's  Report  for  1919  we  learn  that 
bank  deposits  in  the  United  States  amounted  to  about 
thirty-three  billions  of  dollars,  while  the  reserve  held 
against  them  was  just  a  trifle  over  one  billion  dollars. 
That  is,  in  the  richest  country  in  the  world,  the  banks,  in- 
cluding the  Federal  Reserve,  has  less  than  three  dollars 
for  every  hundred  they  promise  to  pay.  This  reserve 
is  sufficient  to  take  care  of  the  demand  for  payments  in 
money  in  normal  times,  but  when  an  abnormal  demand 
comes,  it  is  found  inadequate. 

Similar  conditions  existed  in  1907.  Business  failiires 
and  other  causes  had  precipitated  a  panic,  which  became 
general.  The  result  was  an  abnormally  large  demand 
for  money  from  the  banks — depositors  clamored  to  with- 
draw their  deposits.  And  there  were  only  about  two  or 
three  dollars  in  the  country  to  pay  each  hundred  dollars 
the  banks  had  promised  to  pay. 

There  was  only  one  way  out  of  the  difficulty,  and  the 
banks  took  it.  They  put  their  credit  in  tangible  form, 
and  in  such  shape  that  it  looked  like  money.  They  issued 
clearing  house  certificates,  in  appearance  similar  to 
government  issued  paper  money,  and  the  public  accepted 
it. 

In  fact  they  had  to  accept  it.  There  was  no  other 
alternative,  for  legal  relief  was  impossible.  State  gov- 
ernors declared  every  day  a  legal  holiday  until  the  scare 
was  over.  As  the  courts  are  closed  on  holidays  and  as 
no  one  could  bring  an  action  against  a  bank  the  certifi- 
cates had  to  be  accepted. 

Several  inferences  are  possible  from  these  issues  of 
clearing  house  certificates. 


"FROZEN  CREDITS"  71 

In  the  first  place  their  issuance  was  positive  proof 
that  the  reserve  system  is  founded  upon  fallacy.  Their 
issuance  also  demonstrated  the  immense  power  of  the 
banking  interests.  But  for  the  moment  we  will  set  these 
matters  aside,  to  come  back  to  them  later,  after  showing 
how  the  events  above  related  prove  the  fallacy  of  the 
gold  standard. 

Under  the  gold  standard,  all  credit  is  supposed  to  be 
a  promise  to  pay  in  gold.  A  check  or  draft  is  looked 
upon  as  an  order  for  real  money  which  is  supposed  to 
be  held  by  the  bank  in  trust  for  the  depositor.  The 
words  on  the  check  make  it  an  order  for  money.  But  the 
money  is  not  there.  While  there  is  sufficient  money  held 
in  reserve  to  take  care  of  the  normal  demand  for  money, 
the  moment  the  demand  becomes  abnormal,  the  system 
breaks  down. 

When  the  abnormal  demand  of  the  panic  of  1907  oc- 
curred, the  banks  could  not  fulfill  their  obligations,  for 
the  money  to  do  so  did  not  exist.  To  get  out  of  the  dif- 
ficulty, they  presented  their  credit  in  a  difi"erent  form, 
and  forced  the  people  to  accept  this  new  form  of  credit 
as  money,  at  its  face  value. 

While  the  public  was  fooled  or  forced  into  accepting 
the  certificates  it  is  obvious,  among  other  things,  that 
the  very  act  of  issuing  them  proved  that  banks  were  un- 
able to  carry  out  their  promises.  The  obligation  of  the 
gold  standard,  to  pay  in  gold  was  clearly  proved  to  be 
impossible  of  fulfillment. 

In  fact  the  greatest  concern  of  our  financiers  today  is: 
"How  can  we  juggle  this  promise  of  gold  redemption 
around  so  as  to  keep  the  people  believing  in  it?"     It  is 


72  THE  STRANGLE  HOLD 

the  same  old  question  that  bothered  the  banker's  pre- 
decessor, the  goldsmith.  In  the  chapter  on  "The  Gold 
Standard"  it  will  be  proved  by  the  words  of  a  former 
Secretary  of  the  Treasury  that  this  question  is  the  bank- 
er's principal  study. 

Were  the  matter  not  so  serious  it  would  be  a  joke  and 
there  is  also  a  bit  of  comedy  behind  the  clearing  house 
certificate  which  savors  of  the  slapstick. 

Panic  occurred  because  the  public  lost  faith  in 
bank  credit.  Perhaps  someone  realized  that  the  banks 
were  not  able  to  fulfill  their  promise  to  pay  in  gold.  For 
they  had  in  all  kinds  of  money  only  about  three  dollars 
with  which  to  pay  a  hundred,  and  so  some  one  became 
nervous.  But  our  financiers  were  equal  to  the  occasion. 
They  got  together  in  their  clearing  house  and  dished 
up  the  same  credit  in  a  little  different  form  and  the 
public  swallowed  it. 

No  pomp  or  show  of  power  in  this — ^just  a  little  sleight 
of  hand.  Our  prince  of  leger-de-main,  the  banker,  issued 
bank  credit  as  money  in  defiance  of  the  law  of  the  land 
and  in  the  face  of  public  distrust,  and  the  people  came 
away  satisfied. 

The  people  were  hoodwinked,  the  infraction  of  the 
law  was  permitted  to  pass  unnoticed,  and  its  soothing 
effect  was  mistaken  for  a  real  cure ;  so  the  same  principle 
was  used  in  the  Emergency  Currency  Act  of  May  thir- 
tieth, 1908,  and  was  later  formulated  into  law  by  the 
Federal  Reserve  Act.  Both  acts  are  attempts  to  escape 
the  consequences  of  a  promise  that  cannot  be  fulfilled. 

Could  anytliing  demonstrate  more  conclusively  the 
weakness  and  fallacy  of  our  financial  system.^ 


"FROZEN  CREDITS"  73 

The  gold  standard  which  promises  that  all  credit 
shall  be  redeemed  in  gold  is  a  falsehood,  consequently 
our  whole  system  is  false,  for  it  is  based  on  this  prom- 
ise. There  is  not  enough  gold  in  existence  to  redeem  even 
a  small  fraction  of  the  outstanding  credit.  Whenever  it 
becomes  necessary  to  fulfill  the  promise  of  gold  redemp- 
tion, that  promise  cannot  be  fulfilled,  and  it  is  necessary 
to  resort  to  tricks  and  subterfuge. 

Now  let  us  turn  to  this  other  phase  of  the  same  prob- 
lem, and  look  into  the  fallacy  of  the  reserve  system. 

To  cash  depositors  and  to  borrowers  alike  the  banker 
extends  his  credit,  in  the  form  of  a  promise  to  pay 
money,  either  on  demand,  or  subject  to  certain  condi- 
tions, such  as  notice  before  withdrawal. 

In  order  to  gain  public  confidence  and  in  a  measure  to 
safeguard  the  interests  of  the  depositor,  the  law  re- 
quires the  bank  to  keep  a  certain  proportion  of  its 
deposits  in  reserve.  In  some  countries  the  proportion 
required  is  left  entirely  to  the  discretion  of  the  banker, 
but  in  this  country  it  is  fixed  by  law  both  for  national 
and  for  most  state  banks. 

The  actual  proportion  required  depends  upon  whether 
the  bank  is  a  state  or  national  bank,  and  upon  whether 
the  deposit  is  a  time  or  demand  deposit — a  savings 
account,  or  a  commercial  account.  Commercial  deposits 
may  be  withdrawn  at  any  time,  but  notice  of  intention 
to  withdraw  must  be  given  some  days  ahead  in  the  case 
of  a  savings  account.  Most  banks,  indeed,  will  pay  even 
savings  accounts  on  demand,  if  times  are  normal,  and 
provided  the  depositor  is  willing  to  forego  his  interest. 

The  above,  in  brief,  are  the  factors  that  control  the 


74  THE  STRANGLE  HOLD 

proportion  of  deposits  required  to  be  held  in  reserve.  A 
member  of  the  Federal  Reserve  System  is  required  to 
keep  in  reserve  from  seven  to  thirteen  per  cent  of  its 
demand  deposits^  according  to  its  location,  and  three  per 
cent  of  its  time  deposits.  These  reserves  must  be  depos- 
ited with  the  Federal  Reserve  Bank  of  the  district  which 
in  turn  must  keep  thirty-five  per  cent  of  these  deposits 
(which  are  reserves  themselves),  in  reserve. 

Now  this  system  is  workable  only  so  long  as  times  are 
normal,  and  there  is  no  great  demand  for  cash — in  other 
words,  so  long  as  industry  and  commerce  are  in  such  a 
condition  of  confidence  that  bank  credit  is  accepted  with- 
out hesitation.  But  where  an  average  of  about  ten  per 
cent  is  all  that  is  kept  in  reserve  by  primary  banks, 
and  where  the  Federal  Reserve  Bank  only  keeps  about 
one-third  of  this  in  reserve,  so  that  in  fact  only  about 
three  to  four  per  cent  of  demand  deposits  are  kept  in  the 
form  of  a  cash  reserve,  then  it  is  obvious  that  the  moment 
a  demand  for  payment  of  deposits  that  is  only  slightly 
greater  than  normal  occurs,  the  whole  system  breaks 
down. 

To  cover  up  the  gold  redemption  lie  and  to  furnish, 
as  the  Federal  Reserve  Act  says  an  "elastic  currency," 
that  act  provides  that  the  thirty-five  percent  the  Federal 
Reserve  Banks  must  retain  as  reserve  against  deposits 
may  be  carried  in  gold  or  "lawful  money."  Greenbacks 
are  "lawful  money"  and  it  will  be  shown  in  a  later  chap- 
ter that  the  banks  may  issue  about  ten  billion  dollars  of 
credit  with  no  reserve  behind  it  except  greenbacks. 

In  addition  the  Federal  Reserve  Act  provides  that  all 
reserve  requirements  may  be  suspended  by  the  Federal 


"FROZEN  CREDITS"  75 

Reserve  Board  at  any  time  and  this  provision  puts  the 
country  on  an  unlimited  paper  money  or  bank  credit 
basis. 

If  the  financiers  who  framed  the  Federal  Reserve  Sys- 
tem believed  that  the  promise  to  redeem  in  gold  could  be 
fulfilled  why  did  they  provide  these  means  of  avoid- 
ing fulfillment? 

They  knew,  as  all  thinking  men  know,  that  the  gold 
standard  promise  is  nothing  but  an  ancient  fetish  and 
so  in  reality  they  have  discarded  it. 

However,  instead  of  establishing  a  better  system  based 
on  truth  they  still  try  to  cover  up  the  basic  falsehood  of 
the  gold  standard  by  a  complicated  system  of  reserves. 

This  bit  of  jugglery  has  so  far  accomplished  the  pur- 
pose of  deception,  but  greatly  to  the  detriment  of  all  con- 
cerned, as  is  evidenced  by  our  present  slump  in  business 
the  exact  cause  for  which  will  soon  appear. 

The  issuance  of  clearing  house  certificates,  aff"ords 
proof  that  the  gold  reserve  is  a  fiction.  Every  panic, 
in  fact,  was  abundant  testimony.  When  banks  had  to 
close  their  doors,  when  legal  holidays  were  declared  to 
relieve  them  from  payment,  when  a  thousand  and  one 
other  subterfuges  have  had  to  be  employed  to  escape  from 
the  promise  of  gold  redemption  is  it  not  marvelous  that 
the  foolish  promise  still  continues  to  be  the  basis  of  our 
credit  system? 

It  was  formerly  the  custom  of  the  English  Banks, 
when  a  run  was  being  made  upon  them  by  frightened 
depositors,  to  pay  in  sixpences.  The  long  time  required 
to  pay  any  considerable  sum  in  this  shape  gave  them  lee- 
way, and  a  chance  to  tide  over  the  critical  period  until 


76  THE  STRANGLE  HOLD 

the  panic  was  over.  Such  a  custom  is  merely  illustra- 
tive of  many  other  devices  that  have  been  used  and  al- 
ways will  have  to  be  employed  as  long  as  the  false  idea 
of  a  reserve  system  is  maintained. 

It  is  hardly  necessary  to  proceed  further  in  this  as  the 
falsity  of  the  system  of  cash  reserves  behind  deposits  is 
sufficiently  clear.  Let  us  now  sum  up  the  points  we  have 
offered,  and  proceed  further  in  our  search  for  the  cause 
of  our  present  troubles. 

It  has  been  shown,  in  the  first  place,  that  credit,  as  it 
exists  today,  is  founded  upon  a  fallacy.  The  problem 
was  divided  into  two  phases,  and  the  fallacy  in  each 
case  has  been  demonstrated.  There  is  no  alternative  but 
to  accept  the  truth  that  our  present  credit  system,  and, 
consequently,  our  banking  system,  which  controls  our 
credit,  is  founded  upon  a  lie.  It  is  no  "white"  lie  either, 
for  it  causes  any  amount  of  trouble. 

In  order  to  emphasize  this  fact  let  us  digress  for  a 
moment,  and  see  what  are  some  of  the  results  of  this 
fallacious  system. 

In  the  early  part  of  this  book  an  example  was  given 
of  how  the  bankers  refused  to  extend  credit  for  an  enter- 
prise which  would  have  benefited  society  and  which  was, 
therefore,  deserving  of  credit.  And  from  this  fact  we 
reasoned  that  the  banker,  by  obstructing  the  fullest  prog- 
ress of  industry,  had  acted  against  the  best  interests  of 
society. 

At  the  same  time  it  was  hinted  that  this  might  per- 
haps not  be  the  banker's  fault. 

Let  us  now  take  the  case  of  a  banker  who  has  ex- 
tended his  loans  to  such  a  degree  that  his  cash  on  hand 


"FROZEN  CREDITS"  77 

and  his  credit  with  the  Federal  Reserve  are  only  suf- 
ficient to  cover  the  reserves  required  to  be  held  against 
deposits. 

Then,  although  the  project  above  mentioned  were  de- 
serving of  credit,  and  although  good  security  were  offered 
and  the  banker  wanted  to  make  the  loan  he  could  not 
grant  it,  for  he  would  not  have  any  cash  to  hold  or 
fufcds  to  deposit  with  the  Federal  Reserve  Bank  as  a 
reserve  against  the  deposit  that  the  loan  would  create. 

In  other  words  the  bank  has  arrived  at  its  limit.  It 
has  let  out  all  the  credit  that  the  reserve  requirement  will 
permit. 

For  instance  take  the  little  bank  we  started  business 
with  at  the  beginning  of  this  book.  It  had  in  cash  from 
the  sale  of  its  stock  and  from  deposits  $60,000,  and  it 
was  required  to  keep  a  10%  reserve  which  means  that 
it  had  to  have  10%  of  its  deposits  in  cash  or  on  deposit 
with  the  Federal  Reserve.  So  this  little  bank  could  have 
$600,000  in  deposits.  As  was  shown  all  but  $50,000  of 
these  deposits  or  $550,000  was  created  by  the  bank  mak-* 
ing  loans.  Now,  when  a  bank  arrives  at  this  point,  unless 
it  gets  in  more  cash  or  paper  that  it  can  deposit  with  the 
Federal  Reserve,  it  can  make  no  more  loans  without  ex- 
ceeding its  reserve  limit.  When  a  bank's  business  reaches 
this  state  it  must  refuse  to  make  loans.  Its  credit  is  no 
longer  "liquid" — it  has  arrived  at  the  zero  point  where 
bank  credit  "freezes." 

Although  we  hear  much  of  "Frozen  Credits"  today  the 
objection  may  still  be  made  that  we  are  here  taking  an 
extreme  case,  and  one  that  does  not  often  exist.  The 
answer  to  this,  if  any  be  required,  is  that  the  banker's 


78  THE  STRANGLE  HOLD 

fear  of  going  too  near  the  margin  of  his  reserves,  has  a 
similar  effect,  so  that  even  in  cases  which  are  not  so  ex- 
treme, there  is  the  tendency  to  refuse  loans  where  loans 
should,  in  the  interests  of  industrial  progress,  be  ex- 
tended. Consequently,  there  is  the  tendency  to  hamper 
progress. 

The  extreme  case  is  selected  for  illustration,  because 
it  shows  the  matter  in  the  clearest  manner,  but  the 
tendency  is  there  and  has  a  very  strong  influence  whether 
the  case  is  an  extreme  one  or  not. 

It  becomes  clear  then  that  credit  "freezes"  because 
it  is  based  on  gold  and  that  "frozen  credits"  which  are 
the  cause  of  our  present  business  slump  are  in  reality 
"guilded  credits."  That  is  the  gold  redemption  promise 
is  the  element  that  causes  bank  credit  to  freeze. 

Now  it  is  also  clear  that  credit  is  necessary  to  trade 
and  since  trade  creates  industry,  as  credit  freezes,  so  in- 
dustry slows  down.  This  condition  makes  our  present 
system  very  awkward,  for  since  prosperity  increases  the 
demand  for  credit,  the  more  prosperous  business  becomes 
the  quicker  bank  credit  freezes  for  the  sooner  it  arrives 
at  the  zero  point  set  by  the  reserve. 

So,  as  long  as  we  continue  a  financial  system  where 
credit  is  based  on  reserves,  prosperity  will  always  check 
prosperity. 

It  is  akin  to  the  automobile  previously  referred  to  with 
the  reverse  gear  where  the  high  speed  should  be.  If 
you  can  imagine  yourself  trying  to  operate  or  even  ride 
in  such  a  machine  you  will  have  a  mental  picture  of  our 
present  social  system  and  will  understand  the  cause  of 
its   worries   and   disappointments.    As   soon  as  business 


"FROZEN  CREDITS"  79 

speeds  up  a  little  the  "reverse  gear/'  that  is  the  reserve 
requirement^  gets  in  its  work  and  back  we  go. 

Succeeding  chapters  will  show  how  this  "reverse 
gear"  may  be  removed  or  in  other  words  how  to  do  away 
with  the  false  promise  of  gold  redemption  which  causes 
bank  credit  to  "freeze."  When  we  perform  the  slight 
operation  suggested  prosperity  will  return  and  it  will  be 
continuous- 

Now  in  addition  to  showing  clearly  one  of  the  harm- 
ful effects  of  a  false  system  of  credit^  the  foregoing  il- 
lustration gives  a  hint  at  the  fault  that  lies  behind  all 
the  other  faults,  and  which  must  be  taken  into  account 
before  a  remedy  can  be  devised  that  will  really  be  a 
remedy. 

Briefly,  the  banker  could  not,  Ln  the  above  case,  ex- 
tend the  loan,  because,  although  the  security  offered  was 
good,  it  was  not  a  liquid  security  or  a  form  of  security 
required  for  rediscount  at  the  Federal  Reserve. 

In  the  development  of  commerce  from  barter  to  ex- 
change by  means  of  money,  a  few  commodities,  and 
finally  only  one  commodity,  came  to  be  chosen  as  the 
medium  of  exchange. 

In  the  development  of  exchange  by  means  of  credit, 
the  superiority  of  this  one  commodity — gold — was  not 
assailed. 

But  commerce  has  now  outgrown  credit  based  on  one 
commodity,  and  requires  a  system  of  credit  based  on  all 
commodities  of  value  and  one  which  will  always  have 
a  full  measure  of  public  confidence. 

But  before  we  discuss  the  remedy,  we  mnst  see  clearly 
•what  must  be  remedied.    We  will  continue,  therefore. 


80  THE  STRANGLE  HOLD 

with  our  inquiry  into  the  defects  of  our  present  system 
of  exchange. 

In  discussing  the  issue  of  clearing  house  certificates, 
we  stated  that  those  issues  which  got  into  public  circula- 
tion afforded  a  powerful  instance  of  the  immense  power 
of  the  banking  interests. 

In  issuing  these  certificates,  and  allowing  them  to  get 
into  public  circulation,  these  interests  committed  an  in- 
fraction of  the  law,  and  escaped  unpunished. 

The  Constitution  reserves  the  right — "to  coin  money'* 
— to  the  Federal  Government.  Money  is  the  medium  of 
exchange,  and  clearing  house  certificates  became  part 
of  the  medium  of  exchange  while  they  were  in  public 
circulation.  There  was  no  legal  sanction  to  the  issuing 
of  those  certificates,  and  in  issuing  them,  therefore,  the 
clearing  houses,  and  through  them  the  bankers,  infringed 
the  law. 

Now  there  is  no  doubt  that  the  expedient  of  issuing 
those  certificates  prevented  further  disaster,  but  this 
does  not  lessen  the  fact  that  it  was  an  infraction  of  the 
law.  And  it  is  perfectly  obvious  that  no  lesser  power  than 
the  banking  interests  would  have  been  permitted  to 
justify  an  infraction  of  the  law  by  the  plea  of  expe- 
diency. 

That  they  were  allowed  to  do  so,  therefore,  and  escaped 
unpunished,  indicates  the  extent  of  their  power. 

We  have  had  many  evidences  of  the  existence  of  a  bid- 
den power  which  is  superior  to  government  authority,  but 
probably  no  occurrence  has  ever  pointed  out  more  dis- 
tinctly the  extent  of  this  power,  and  at  the  same  time  the 
exact  source  from  which  it  springs. 


"FROZEN  CREDITS"  81 

And  furthermore,  the  plea  of  expediency  is  in  itself 
an  indictment  of  the  system  which  makes  such  an  expe- 
dient necessary.  For  the  plea  of  expediency  implies 
that  the  method  resorted  to  was  illegal. 

Would  anyone  be  disposed  to  deny  that  a  system  which 
requires  the  use  of  an  illegal  expedient  to  avoid  the  harm- 
ful results  of  its  inadequacy  is  a  faulty  system,  and 
therefore  one  which  should  be  revised? 

Here  we  have  at  one  time  an  illustration  showing 
that  our  medium  of  exchange  is  entirely  inadequate  to 
perform  the  service  required  of  it,  and  also  a  glimpse  of 
the  tremendous  power  the  group  which  controls  it  has 
acquired. 

These,  then,  are  the  faults  of  our  present  medium  of 
exchange. 

Primarily,  it  is  in  the  control  of  private  interests,  who 
can  determine  its  amount,  and  whose  control  inevitably 
tends  toward  a  restriction  in  volume,  so  that  industry  is 
continually  hampered  and  every  period  of  prosperity  is 
invariably  followed  by  a  period  of  contraction  in  the 
medium  of  exchange  resulting  in  depression  of  business. 

Secondly,  the  medium  of  exchange,  as  it  exists  today, 
rests  upon  a  false  foundation,  one  that  is  too  narrow,  one 
which,  although  usable  during  the  earlier  stages  of  the 
development  of  bank  credit,  has  become  outgrown, 
and,  lastly,  one  which  contributes  to  the  destructiveness 
of  the  private  control  of  bank  credit. 

This  foundation  is  the  gold  standard,  under  which  all 
credit  is  based  upon  gold,  and  the  medium  of  exchange 
is  supported  by  a  gold  reserve  rather  than  by  sound 
credit  based  on  real  value. 


82  THE  STRANGLE  HOLD 

The  whole  purpose  of  this  discussion  has  been  to 
point  a  way  to  a  remedy. 

Now  that  we  see  clearly  where  the  present  system  falls 
short,  and  where  it  is  necessary  to  apply  correction,  we 
can  understand  what  features  the  remedy  must  possess, 
in  order  to  satisfy  the  present  demands  of  commerce. 

We  are  consequently  now  ready  to  proceed  in  our 
search  for  an  improvement  which  will  do  away  with  these 
shortcomings  in  our  financial  system  and  which  will 
not  only  restore  the  country  to  a  condition  of  prosperity 
but  which  will  permit  prosperity  to  continue. 

But  there  is  another  point  that  we  must  bear  in  mind, 
and  that  is  to  make  the  remedy  practical.  We  must  take 
things  as  they  are  today,  and  devise  a  means  which, 
while  effectual  in  abolishing  the  trouble,  does  not  necessi- 
tate such  wide-sweeping  changes  as  to  be  practically  im- 
possible of  application. 

We  cannot  reach  far  without  standing  on  the  shoulders 
of  our  predecessors,  and  we,  therefore,  should  seek  to 
preserve  the  good  qualities  of  the  present  order,  while 
modifying  it  only  so  far  as  is  necessary  to  eradicate  the 
shortcomings.  In  this  way  only  can  a  practical  and  per- 
manent change  for  the  better  be  hoped  for. 

With  this  in  mind,  our  next  step  is  to  inquire  more 
closely  into  what  might  be  called  the  philosophy  of 
money — to  see  exactly  what  the  nature  of  our  medium 
of  exchange  is,  what  place  it  should  fill,  and  what  its 
functions  should  be.  Then  we  may  proceed  to  our  in- 
quiry as  to  what  actual  measures  must  be  taken  to  modify 
the  present  system  in  such  a  way  that  our  exchange 
medium  will  fulfill  its  proper  functions. 


"FROZEN  CREDITS"  83 

Then  the  next  step  after  that,  the  last  step,  will  be  to 
suggest  tlie  actual  means  by  which  these  measures  can 
be  practically  applied  to  our  present  system  and  finally 
we  must  show  that  they  accomplish  the  desired  result. 


CHAPTER  VI 
A  PERFECT  EXCHANGE  SYSTEM 

IN  ORDER  to  determine  what  sort  of  medium  of  ex- 
change would  best  be  suited  to  existing  conditions  of 
modern  industry  and  commerce,  the  first  step  is  to  gain 
a  definite  idea  of  the  proper  functions  of  a  medium  of 
exchange. 

For  this  purpose  let  us  first  of  all  make  a  distinction 
which,  while  somewhat  arbitrary,  may  help  us  to  obtain 
a  better  understanding  of  the  subject;  that  'S  the  dis- 
tinction between  money  and  the  medium  of  exchange. 

Money  is  a  measure  of  value,  while  the  medium  of 
exchange  is  the  means  used  to  transfer  the  ownership  of 
goods  and  to  compensate  services. 

In  order  to  make  this  distinction  clear,  let  us  compare 
the  conceptions  of  value  and  length.  Both  value  and 
length  express  a  ratio  between  different  objects.  We 
say,  this  is  longer  or  shorter  than  that,  and,  this  is  more 
or  less  valuable  than  that.  And  in  order  the  more  easily 
to  compare  the  length  of  different  objects,  an  arbitrary 
table  of  standards  has  been  fixed.  A  certain  absolute 
length  is  called  a  foot.  One-twelfth  of  this  length  is  an 
inch.    A  length  equal  to  three  feet  is  a  yard. 

A  similar  table  of  standards  is  made  as  regards  value. 
In  the  United  States  this  money  table  for  measuring 
value  is  as  follows: 

84. 


A  PERFECT  EXCHANGE  SYSTEM  85 

Ten  mills  make  one  cent. 
Ten  cents  make  one  dime. 
Ten  dimes  make  one  dollar. 

And  just  as  a  certain  definite  length  was  arbitrarily- 
set  and  called  a  foot,  so  was  it  also  intended  that  a  cer- 
tain arbitrary  amount  of  value  should  be  called  a  dollar. 

In  itself,  then,  money  is  not  value,  but  the  measure  of 
the  exchangeable  ratios  between  various  goods  and  serv- 
ices— that  is,  money  is  the  measure  of  value. 

What  the  foot  is  to  the  measure  of  length,  the  dollar 
is  to  the  measure  of  value.  The  foot  is  that  unit  in  which 
we  express  length  and  the  dollar  is  the  unit  in  which  we 
express  value  or  price. 

In  order,  therefore,  to  determine  what  are  the  qual- 
ities essentially  required  in  an  ideal  medium  of  exchange, 
it  is  necessary  first  to  determine  exactly  what  are  the 
functions  of  money.  Having  determined  this,  it  is  then 
possible  to  proceed  and  determine  what  qualities  a 
medium  of  exchange  should  have  in  order  to  fulfill  those 
functions  in  an  adequate  manner. 

The  object  of  transportation  is  to  add  value  to  goods 
by  changing  their  location;  the  railroads  are  one  of  the 
most  important  factors  in  carrying  out  this  object.  Sim- 
ilarly, the  object  of  money  is  to  add  value  to  goods  by 
facilitating  a  change  in  their  ownership,  so  that  they 
will  be  owned  by  someone  to  whom  they  are  worth  more ; 
this  object  is  carried  out  by  means  of  the  medium  of  ex- 
change. 

Just  as  the  ideal  transportation  medium  is  the  medium 
which  will  change  the  location  of  goods,  whenever  neces- 


86  THE  STRANGLE  HOLD 

sary,  with  the  least  possible  effort  and  trouble,  so  the 
ideal  medium  of  exchange  is  the  medium  which  will 
change  the  ownership  in  goods  with  the  least  possible 
friction,  trouble,  and  loss,  and  whenever  necessary. 

The  medium  of  exchange,  then,  is  not  an  end  in  itself, 
but  only  a  means  to  an  end.  It  is  a  means  by  which 
people  may  exchange  what  they  have  for  something 
which  they  are  more  desirous  of  having. 

This  exchange  could  be  made  directly,  by  means  of 
bartering  one  goods  for  another,  but  at  best  barter  is  a 
very  cumbersome  and  unsatisfactory  method.  Exchange 
carried  on  by  barter  is  practiced  only  in  the  early  stages 
of  civilization.  Even  the  smallest  advancement  in  civil- 
ization requires  some  sort  of  a  medium  of  exchange  in 
order  to  carry  on  trade. 

People,  therefore,  are  interested  in  getting  money  for 
what  they  have  only  in  order  that  they  may  get  what 
they  want  at  some  future  time  in  exchange  for  what- 
ever they  accept  as  money. 

Immediately  we  see  one  essential  requirement  of  any 
medium  of  exchange,  acceptability.  People  will  not  give 
up  their  goods  for  a  medium  unless  they  are  sure  that  in 
turn  they  can  get  in  exchange  for  that  medium  what  they 
want.  They  must  feel  sure  that  other  people  will  accept 
from  them  the  medium  of  exchange  in  return  for  the 
goods  they  have  to  sell. 

"Safety  First"  or  confidence  then  in  the  medium  of 
exchange  is  the  first  necessary  requisite. 

Furthermore,  people  are  interested  not  only  in  getting 
something  in  exchange  for  what  they  give  up — they  are 
interested  also  in  getting  an  equal  amount  of  value  and 


A  PERFECT  EXCHANGE  SYSTEM  87 

having  what  they  get  retain  its  value.  Here  we  have 
the  element  of  time. 

Some  time  must  elapse  from  the  moment  when  a  per- 
son gives  up  the  goods  he  possesses — or  the  services  he 
renders,  his  labor — in  exchange  for  a  quantity  of  the 
medium  of  exchange,  and  the  moment  that  he  uses  it,  or 
a  part  of  it,  to  purchase  the  goods  he  desires.  This  time 
may  be  longer  or  shorter,  but  irrespective  of  its  length, 
it  is  essential  that  the  medium  of  exchange  shall  not 
shrink  in  value  while  it  is  in  his  hands. 

The  reverse  is  also  essential — the  medium  of  exchange 
must  not  swell  in  value.  For  while  this  would  benefit  the 
person  who  possesses  a  quantity  of  the  medium  of  ex- 
change, it  would  work  just  as  great  an  amount  of  harm 
to  some  other  person  who  is  not  holding  the  medium  of 
exchange,  and  who  finds  it  more  difficult  to  obtain  the 
same  in  exchange  for  his  goods. 

These  then  are  the  two  essentials  of  the  ideal  medium 
of  exchange.  The  people  must  have  absolute  confidence 
in  it,  so  that  it  will  be  accepted  by  everybody  without 
question.  This  condition  prevails  only  when  everybody 
feels  quite  sure  that  he  will  be  able  to  get  what  he  de- 
sires in  exchange  for  it. 

And  secondly,  it  must  have  an  absolutely  stable  value. 
The  dollar  must  not  grow  larger  or  smaller. 

Think  of  what  would  happen  if  the  standard  of  other 
measures  should  fluctuate. 

Suppose  the  yardstick  were  shortened  one  inch.  Then 
the  creditor  who  had  due  him  ten  yards  of  cloth  would 
lose  ten  inches.  And  on  the  other  hand,  if  the  yard  stick 
were  lengthened  one  inch,  the  creditor  would  gain  ten 


88  THE  STRANGLE  HOLD 

inches  this  time,  but  the  debtor,  the  man  who  had  to  hand 
over  ten  yards  of  cloth,  would  have  to  hand  over  a 
length  equal  to  ten  inches  longer  than  he  had  bargained 
to  hand  over.  The  debtor  in  this  case  would  lose  ten 
inches  of  cloth,  or  an  amount  of  value  corresponding  to 
the  value  of  ten  inches  of  cloth.  Think  of  the  havoc  and 
confusion  such  an  occurrence  would  give  rise  to. 

And  this  is  precisely  what  does  happen  to  the  meas- 
ure of  value. 

Commercially,  value  is  price.  The  exchangeable  value 
of  anything  is  its  price.  If  we  shorten  the  value  meas- 
ure prices  go  up  for  it  takes  less  goods  to  equal  a  certain 
sum  and  if  we  lengthen  the  value  measure  it  will  take 
more  goods  so  prices  will  go  down.  An  example  will 
make  this  clear. 

In  the  early  days  of  colonial  Virginia  the  colonists, 
for  want  of  coins  of  precious  metals,  used  tobacco  as  a 
medium  of  exchange.  When  tlie  tobacco  crojj  was  large, 
the  volume  of  the  medium  of  exchange  became  inflated, 
and  it  took  more  tobacco  to  buy  a  bolt  of  cloth,  a  keg  of 
rum  or  a  sack  of  potatoes  than  it  did  when  the  crop  was 
normal.  In  other  words,  a  heavy  crop  of  tobacco  meant 
that  prices  would  be  high.  This  favored  the  debtor  for 
it  shortened  the  measure  of  value  and  thereby  reduced 
the  amount  of  goods  or  services  he  must  render  to  pay 
his  debts  just  as  the  shortening  of  the  yard  stick  would 
reduce  the  amount  of  cloth  the  seller  would  give  for  a 
yard. 

Conversely,  when  the  tobacco  crop  was  small,  the 
volume  of  the  medium  of  exchange  contracted,  and  the 
same  articles  could  be  bought  with  less  tobacco.     A  bad 


A  PERFECT  EXCHANGE  SYSTEM    89 

crop  of  tobacco  meant  low  prices  or  the  lengthening  of 
the  measure  of  value. 

Tobacco,  although  a  clumsy  medium  of  exchange,  in 
principle  is  not  different  from  gold  and  silver,  which 
are  mined  in  unequal  quantities  yearly. 

It  was  the  discovery  of  gold  in  Alaska  and  the  conse- 
quent enlargement  of  this  medium  that  allayed  the  free 
silver  talk  of  the  nineties,  not  any  law  passed  by 
Congress.  Increase  in  the  volume  of  gold  brought  down 
its  price,  and  relieved  the  evil  of  contraction  and  low 
prices. 

In  the  above  discussion,  by  prices  we  mean  the  general 
level  of  prices,  or  the  purchasing  power  of  the  dollar.  A 
change  in  the  general  level  of  prices  is  in  reality  a 
change  in  the  value  of  the  dollar  and  such  a  change  is 
just  as  great  an  evil  as  a  change  in  the  measure  of 
length  would  be.  It  is  a  change  in  the  value  unit  and  is 
analogous  to  a  change  in  the  length  of  the  yardstick. 

When  a  man  exchanges  his  goods  for  any  medium  of 
exchange,  his  only  concern  is  that  what  he  receives  shall 
be  accepted  from  him  at  the  same  value  measured  in 
dollars  and  cents. 

A  stable  value  for  the  dollar  does  not  mean  that  indi- 
vidual prices  should  remain  constant.  We  have  no  right 
to  ask  that  a  given  amount  of  the  medium  of  exchange 
shall  exchange  for  the  same  amount  of  flour  or  clothing 
or  labor  the  next  year  as  it  does  this.  Individual  prices 
of  individual  commodities  must  be  determined  by  the 
demand  for  and  supply  of  the  particular  article  or 
service. 

The  sole  object  of  any  medium   of  exchange  is  to 


90  THE  STRANGLE  HOLD 

keep  track  of  credits.  It  is  a  system  of  book-keeping, 
and  the  book-keeper  should  be  on  the  square,  so  that  a 
given  credit  shall  mean  the  same  thing  from  one  time 
to  another. 

The  unit  of  value — the  dollar  in  the  United  States, 
should  transfer  the  same  amount  of  value  at  all  times. 
The  amount  of  value  commanded  by  the  different  com- 
modities may  vary,  and  must  vary,  with  changing  condi- 
tions of  supply  and  demand  of  those  commodities,  but 
the  amount  of  value  which  the  dollar  measures  must  be 
expressed  in  unvarying  units. 

Value  is  divided  into  fixed  units  only  for  purposes  of 
comparison — in  order  that  we  may  compare  the  worth  of 
one  commodity  with  that  of  another — and  of  what  use 
are  those  units  unless  they  mean  the  same  thing  at  all 
times  the  same  as  do  other  measures?  The  value  of  the 
dollar  must  not  fluctuate.  That  is,  the  average  price 
level  must  remain  constant. 

This  is  in  nowise  affected  by  the  substance  out  of 
which  the  measure  of  value  happens  to  be  made.  There 
is  no  more  need  to  make  an  eagle  out  of  gold,  a  dollar 
out  of  silver,  and  a  cent  out  of  copper,  than  to  make  a 
yardstick  out  of  gold,  a  foot  rule  out  of  silver,  and  an 
inch  measure  out  of  copper. 

We  are  interested  in  the  thing  measured  and  not  in 
the  measure  itself.  Convenience  is  the  only  rule  to  be 
followed  here. 

These  then  are  the  two  requirements  which  the  ideal 
medium  of  exchange  must  possess :  confidence,  or  unvary- 
ing acceptability,  and  stability,  or  unvarying  value. 

The  value  or  price  of  the  dollar  depends  upon  two 


A  PERFECT  EXCHANGE  SYSTExM  91 

factors  and  their  relation  to  each  other.  These  are,  the 
volume  of  the  medium  of  exchange — the  number  of  dol- 
lars in  circulation — and  the  volume  of  business  trans- 
acted by  that  medium — the  number  and  amount  of  the 
exchanges  which  those  dollars  must  effect. 

Convenience  alone  dictates  the  actual  relation  between 
these  two,  that  is,  the  number  of  dollars  which  are  best 
adapted  to  effect  the  exchange  of  a  given  amount  of 
value,  but  once  this  relation  has  been  set,  it  should  remain 
fixed,  and  not  fluctuate,  as  it  does  today. 

The  fluctuation  of  this  relation — the  number  of  dollars 
to  a  given  amount  of  value — occurs  only  because  the 
medium  of  exchange  does  not  vary  hand  in  hand  with 
variations  in  the  volume  of  business. 

As  we  have  already  seen,  if  the  volume  of  business 
increases  while  the  volume  of  the  medium  of  exchange 
remains  unchanged,  then  each  unit  of  the  medium  of 
exchange,  each  dollar,  will  have  to  exchange  a  larger 
amount — will  have  to  do  more  work.  Prices  will  go 
down,  that  is,  the  price  of  money  will  go  up.  The  value 
of  the  measure  of  value  has  increased,  and  the  results 
are  analogous  to  the  results  of  an  increase  in  the  length 
of  the  measure  of  length.  When  the  dollar  stretches 
it  takes  more  wheat  to  make  a  dollar's  worth  and  if  the 
yardstick  would  be  stretched  it  would  take  more  cloth 
to  make  a  yard.  If  the  volume  of  the  medium  of  ex- 
change was  normal  before  the  volume  of  business  in- 
creased, then  it  is  insufiicient  now,  and  the  community 
is  suffering  from  contraction. 

The  very  same  thing  happens  if  the  volume  of  business 
remains  the  same  and  the  medium  of  exchange  shrinks. 


92  THE  STRANGLE  HOLD 

Inflation,  as  we  have  seen,  has  the  opposite  effect.  It 
is  the  result  either  of  a  decreased  volume  of  business  with 
the  same  volume  of  the  medium  of  exchange,  or  of  an 
increased  volume  of  the  medium  of  exchange  with  an 
unchanged  volume  of  business.  Its  effects  are  similar  to 
those  which  would  follow  if  we  squeezed  the  yardstick 
down,  so  that  it  became  shorter.  The  value  of  each  unit, 
each  individual  dollar,  decreases,  and  the  general  level 
of  prices  increases. 

Inflation  raises  prices  and  deflation  lowers  them. 
This  change  occurs  without  any  change  in  the  supply  of 
or  demand  for  the  various  commodities  other  than  as  the 
demand  is  affected  by  the  volume  of  money.  It  really  is 
not  that  the  prices  of  any  commodities  have  changed,  but 
that  the  value  of  the  dollar  has  fluctuated. 

And  now  we  see  that  the  only  way  to  stop  the  dollar 
from  fluctuating  in  value  is  to  tie  the  medium  of  exchange 
in  such  a  way  to  the  volume  of  business  that  the  two 
will  always  vary  together. 

If  the  volume  of  business  is  cut  in  half,  the  volume 
of  the  medium  of  exchange  will  then  also  be  cut  in  half, 
and  a  single  dollar  will  express  the  same  amount  of  value 
as  before. 

And  if  the  volume  of  business  doubled,  then  the  volume 
of  the  medium  of  exchange  would  be  doubled,  and  a 
dollar  would  still  be  worth  just  as  much  as,  and  not  more 
than,  before. 

We  require  a  medium  of  exchange,  then,  that  is  elastic, 
and,  furthermore,  this  elasticity  must  be  governed  by 
the  volume  of  business,  so  that  the  relation  or  ratio 
between  the  volume  of  business  and  the  volume  of  the 


A  PERFECT  EXCHANGE  SYSTEM         93 

medium  of  exchange  shall  always  remain  the  same. 
When  this  is  done,  the  value  of  the  dollar  will  not 
fluctuate. 

An  apparently  natural  question  that  would  arise  at 
this  point  is,  what  volume  of  medium  of  exchange  is 
suited  to  a  given  volume  of  business?  What  amount  of 
money  is  necessary  to  a  community  ? 

Economists  in  the  seventeenth  century  attempted  to 
answer  this  question  in  definite  terms. 

For  instance^  Sir  William  Petty  set  the  amount  of 
money  necessary  as  one  half  the  rent  of  land,  one  fourth 
the  amount  of  the  building  rent,  and  one  fifty-second 
part  of  the  annual  wages  of  labor — this  last  indicating^ 
that  wages  were  paid  weekly  on  the  average. 

The  philosopher  Locke's  view  was  that  the  amoimt  of 
money  necessary  in  any  community  was  one-fifth  of  the 
laborer's  wages,  one-fourth  of  the  land  owners*  revenues, 
and  one-twentieth  of  the  traders'  yearly  returns. 

Modern  economists  have  had  the  good  sense  not  to 
venture  a  guess  at  this  question,  which  in  fact,  is  an 
unanswerable  one. 

But  while  no  attempt  is  made  by  modern  writers  to 
fix  the  volume  of  the  medium  of  exchange  required  for 
business  the  idea  still  persists  that  there  is  some  fixed 
ratio  or  amount.  The  idea  shows  itself  in  such  expres- 
sions as,  "Business  will  revive  when  we  get  back  to 
NORMAL,"  "Good  times  will  return  when  prices  come 
to  normal;'  "NORMALCY  will  bring  prosperity," 
etc. 

All  such  expressions  suggest  that  the  user  believes 
there  is   a  normal   condition   to  be  reached  under   our 


94  THE  STRANGLE  HOLD 

present  system.  That  is  they  suggest  that  there  is  a 
certain  fixed  volume  for  our  medium  of  exchange  or  at 
least  that  there  is  a  certain  fixed  ratio  between  the 
volume  of  business  and  that  of  the  medium  of  exchange. 

If  there  ever  was  or  could  be  such  a  ratio  it  is  evident 
that  it  is  impossible  of  attainment  under  our  system  so 
long  as  it  is  based  on  a  fictitious  reserve  and  is  privately 
controlled.  The  truth  of  this  statement  should  be  per- 
fectly apparent  for  it  has  been  demonstrated  beyond 
question  that  under  our  present  system  the  volume  of 
the  medium  of  exchange  controls  the  volume  of  business. 
When  the  private  control  lets  out  credit  and  allows  busi- 
ness to  get  into  a  prosperous  condition  the  demand  for 
credit  increases  and  runs  bank  credit  up  against  the  re- 
serve, the  "freezing"  point,  and  "Frozen  Credits"  cause 
a  slump.  Consequently  our  condition  is  never  normal 
and  never  can  be  so  long  as  these  defects  remain.  The 
fever  of  prosperity  produces  the  subnormalcy  of  slump. 
So  we  are  always  looking  for  "NORMALCY/'  meaning 
a  condition  of  peace  and  good  will,  but  "NOR]MALCY" 
never  arrives.  Our  exchange  system  makes  our  normal 
condition  one  of  uncertainty,  worry  and  turmoil. 

A  normal  condition,  however,  can  be  reached  when  by 
public  control  we  tie  the  volume  of  the  medium  of 
exchange  to  the  requirements  of  business  so  that  the 
demands  of  business  will  control.  Then  normalcy  will 
arrive,  for  if  the  medium  of  exchange  were  placed  under 
such  conditions  the  volume  would  take  care  of  itself,  it 
would  be  automatically  regulated  to  the  correct  amount, 
being  neither  more  nor  less  than  necessary  and  the  dollar 
"would  not  fluctuate  in  value. 


A  PERFECT  EXCHANGE  SYSTEM  95 

Since  the  medium  of  exchange  is  only  a  means  to 
an  end  and  not  an  end  in  itself — the  end  being  to  facili- 
tate trade,  that  is  to  permit  one  to  obtain  what  one  de- 
sires in  return  for  what  one  has,  the  simplest  medium 
of  exchange  would  be  one  from  which  all  concrete  at- 
tributes were  taken  away. 

That  is  to  say,  it  would  be  merely  a  process  or  system 
of  book-keeping,  and  entirely  abstract. 

Whoever  sold  anything  would  receive  from  the  pur- 
chaser his  I.  O.  U.  for  the  amount  of  the  price.  Who- 
ever bought  anything  would  give  his  I.  O.  U.  to  the 
seller  for  the  amount  of  the  price.  These  I.  O.  U.s 
would  be  sent  to  a  central  clearing  house,  where  those 
taken  by  any  particular  person  would  be  cleared  against 
those  given  out  by  that  person,  and  the  balance  would 
be  charged  or  credited  to  him  according  to  whether  the 
amount  of  those  received  fell  short  of  or  exceeded  the 
amount  given  out. 

This  arrangement  would  be  an  ideal  financial  system. 
By  such  a  system  the  facility  for  exchanging  goods  and 
services  would  be  practically  perfect.  The  medium  of 
exchange  would  be  perfectly  elastic,  for  its  amount  would 
vary  in  exact  proportion  to  variations  in  the  volume  of 
business.  Such  a  system  would  allow  perfect  freedom 
in  the  exchange  of  goods  and  services,  and  would  not 
control  or  hamper  trade  and  production. 

But,  while  such  a  medium  would  fulfill  one  of  the 
two  necessary  requisites  of  an  ideal  medium  of  exchange, 
it  would  not  satisfy  the  other.  It  would  answer  the  need 
of  stability  by  proper  elasticity,  but  it  would  not  fulfill 
the  need  of  confidence. 


96  THE  STRANGLE  HOLD 

The  illustration  is  fcunded  upon  a  false  assumption, 
tlie  assumption  that  every  one  is  honest  and  capable 
of  fulfilling  every  obligation,  and  that  every  one  knows 
that  every  one  else  is  honest  and  capable.  In  other 
words,  it  assumes  one  hundred  per  cent  confidence  in 
one  another  among  all  the  individuals  of  the  community. 
This  is  a  false  assumption,  since  the  human  race  is  not 
invariably  honest,  and  probably  even  less  capable  of  ful- 
filling every  obligation.  The  entire  supposition,  there- 
fore, is  false,  and  such  a  financial  system  could  not  bo 
instituted. 

The  system  is  at  one  extreme.  It  satisfies  one  require- 
ment, the  requirement  of  stability  in  value,  but  it  falls 
entirely  short  of  the  other  requirement,  that  of  con- 
fidence. 

The  metallic  system  is  at  the  other  extreme,  it  ful- 
fills the  requirement  of  confidence,  but  does  not  fulfill 
the  requirement  of  elasticity,  and  consequently  of 
stability. 

The  metallic  system  is  one  in  which  certain  metals 
[form  the  medium  of  exchange.  Such  a  system  would 
iexist  if  gold  alone  formed  the  entire  medium. 

Owin'^j  to  its  scarcity,  and  universal  desirability,  gold 
possesses  ccmething  in  the  nature  of  an  intrinsic  value, 
and  this  quality  gives  to  it  the  necessary  requirement  of 
confidence.  But  the  other  requirements  of  elasticity  and 
stability,  would  be  absent,  in  a  metallic  system.  For,  as 
was  shown  in  preceding  chapters,  the  quantity  of  the 
metal  does  not  vary  with  the  variations  in  the  volume 
of  business.  On  the  contrary,  as  commerce  and  industry 
increases,  the  production  of  gold  tends  to  decrease. 


A  PERFECT  EXCHANGE  SYSTEM  97 

The  metallic  system  then  is  at  the  other  extreme. 
The  requirement  of  confidence  is  fulfilled,  but  the  re- 
quirement of  stability  through  proper  elasticity  is  not 
fulfilled. 

Let  us  now  examine  the  medium  of  exchange  which 
we  actually  do  use,  bank  credit,  in  order  to  determine 
what  requirements  are  necessary  to  make  it  a  better 
medium. 

The  requirement  of  confidence  is  partly  fulfilled,  for 
people  to  a  great  extent  are  willing  to  accept  bank 
credit  in  return  for  their  goods.  But  it  is  only  partly 
fulfilled,  a  fact  which  is  at  once  illustrated  by  the  neces- 
sity for  keeping  monetary  reserves  behind  bank  deposits. 

The  requirement  of  elasticity  is  also  partly  fulfilled  by 
a  complicated  system  of  reserves,  for  the  volume  of  bank 
credit  can  be  increased  or  decreased  without  entire 
reference  to  any  particular  commodity;  but  this  is  only 
within  certain  limits,  partly  because  it  is  still  tied  to  one 
commodity — gold. 

Upon  examination  it  appears,  however,  that  our  pres- 
ent medium  of  exchange  is  not  essentially  difi'erent  from 
the  ideal  arrangement  mentioned,  where  perfect  confi- 
dence was  assumed,  and  personal  I.  O.  U.s  were  the 
medium  of  exchange. 

The  chief  difference  is  that,  not  having  entire  confi- 
dence in  one  another,  our  I.  O.  U.s,  instead  of  being 
used  directly,  are  traded  for  the  banker's  I.  O.  U.,  in 
the  form  of  a  bank  credit  or  deposit,  which  is  trans- 
ferred back  and  forth  among  us  by  means  of  checks. 

It  does  not  necessarily  follow  that  the  banker  is  any 
more  honest  or  capable  than  any  other  individual  in  the 


98  THE  STRANGLE  HOLD 

community,  but  the  increase  of  the  banking  habit  haa 
made  his  credit  better  known,  and  our  banking  laws 
have  promoted  public  confidence.  Therefore,  bank  credit 
is  more  acceptable  than  private  or  personal  credit. 

Bank  credit,  then,  fulfills  both  essential  requirements, 
to  a  limited  extent. 

By  this  limitation,  bank  credit  falls  short  of  being 
an  ideal  medium  of  exchange,  as  it  is  constituted  today. 

But  this  does  not  necessarily  prove  that  bank  credit 
could  not  be  made  the  ideal  medium  of  exchange.  In 
fact,  it  points  rather  to  the  opposite  conclusion. 

Since  it  possesses  both  qualities  to  a  certain  degree, 
it  is  probable  that  a  proper  means  of  creating  and  using 
this  medium  of  exchange  would  make  it  an  ideal  medium. 

This  conclusion  is  still  further  strengthened  by  the 
fact  that  the  reasons  for  its  limitations  are  not  reasons 
necessarily  bound  up  with  the  medium  itself. 

For  instance,  the  reason  why  bank  credit,  as  we  have 
it  today,  does  not  fluctuate  in  volume  with  variations  in 
the  amount  of  business  activity,  is  because  the  control 
of  the  volume  of  bank  credit  is  in  private  hands,  and 
because  it  is  based  on  a  false  standard, — gold  converti- 
bility. Neither  of  these  faults  are  inseparable  from 
bank  credit,  and  consequently  these  bad  qualities  can  be 
exchanged  for  qualities  that  will  enable  the  volume  of 
bank  credit  to  fluctuate  according  to  the  needs  of  busi- 
ness. 

The  problem,  then,  is  comparatively  a  simple  one.  No 
radical  change  is  necessary.  The  present  system  needs 
but  slight  alteration  and  reformation  in  certain  features 
in  order  to  give  us  the  ideal  medium  of  exchange. 


A  PERFECT  EXCHANGE  SYSTEM    99 

The  alterations  required  are  such  as  will,  in  the  first 
place,  put  one  hundred  per  cent  confidence  behind  bank 
credit,  and  in  the  second  place,  take  the  control  of  its 
volume  out  of  private  hands. 

It  must  be  issued  so  all  will  know  it  is  safe.  Control 
must  be  placed  where  variation  in  volume  will  be  regu- 
lated by  business  activity,  so  that  at  no-  time  will  there 
be  too  little  of  the  medium  of  exchange  in  circulation, 
and  likewise  never  too  much,  but  always  the  exact 
amount  required  for  the  needs  of  business. 

Bank  credit  is  no  different  from  any  other  credit  and 
consists  of  confidence  and  time.  The  greater  the  confi- 
dence the  longer  the  time. 

One  hundred  per  cent  confidence  is  confidence  which 
will  extend  for  practically  an  unlimited  time.  This  con- 
fidence the  present  financial  system  lacks,  as  is  shown  by 
the  SO,  60  and  90  day  limit  placed  on  bank  loans.  It  is 
the  lack  of  public  confidence  in  the  bank  that  causes  this 
lack  of  time  in  bank  credit  and  prevents  our  banks  from 
carrying  the  long  time  credits  necessary  for  agriculture 
and  foreign  trade. 

A  practical  remedy  must  supply  the  100%  confidence 
necessary  for  the  perfection  of  our  medium  of  exchange. 
Then  reserve  requirements,  the  gold  standard,  and  all 
similar  makeshifts  used  for  the  purpose  of  holding  con- 
fidence would  disappear,  and  the  banks  could  carry  any 
good  credit  for  any  length  of  time. 

All  good  securities  would  be  liquid  assets.  They  would 
be  bankable  securities.  Industry  would  no  longer  suffer 
from  short  time  credits  or  from  periodical  setbacks, 
because  credit  had  frozen  up.     The  cause  of  "Frozen 


100  THE  STRANGLE  HOLD 

Credits/'  "Bayers'  Strikes"  and  recurring  periods  of 
depression  would  then  be  removed  and  progress  and 
prosperity  would  go  ahead  without  interruption. 

The  other  part  of  the  problem  is  to  ensure  the  proper 
variation  in  the  volume  of  the  medium  of  exchange,  so 
that  expansion  and  contraction  of  the  medium  will  not 
affect  the  value  of  the  dollar  but  will  occur  only  as 
business  espacds  or  contracts  and  industry  will  be 
allowed  full  swing. 

Both  these  objects  can  be  accomplished  by  taking 
bank  credit,  the  medium  of  exchange,  out  of  private 
hands  and  putting  it  under  the  proper  public  control. 

The  next  step  then  is  to  show  how  this  can  be  done  in 
a  practical  way. 


CHAPTER  VII 
100%  SAFETY  AND  ELASTICITY 

NOW  that  we  have  come  to  a  point  M-here  we  can 
seek  to  apply  a  remedy  for  the  situation,  we 
see  that  the  problem  is  a  double  one,  that  it  has  two 
parts. 

In  the  first  place,  it  is  necessary  so  to  tie  the  volume 
of  the  medium  of  exchange  to  trade  and  industry  that  it 
will  correspond  to  variations  in  the  volume  of  business. 
This  regulation  is  necessary  in  order  to  stabilize  the 
value  of  the  dollar  and  to  provide  a  constant  general 
level  of  prices. 

Secondly,  we  have  the  problem  of  gaining  and  holding 
full  public  confidence  in  the  medium;  so  it  will  be  readily 
accepted  by  all. 

The  system  must  be  such  that  everyone  will  know  that 
he  in  turn  will  be  able  to  get  rid  of  the  medium  of  ex- 
change in  payment  for  what  he  wants ;  without  a  shrink- 
age in  value. 

In  short,  the  medium  of  exchange  must  be  such  as 
will  possess  stability  through  proper  elasticity,  and 
safety  through  full  confidence. 

With  regard  to  the  first  requirement,  we  see  that  it 
is  based,  of  course,  upon  the  method  in  which  the  medium 
of  exchange  comes  to  vary  in  volume,  and  we  see  that, 
since  bank  credit  is  our  medium  of  exchange,  and  the 
banker  has  full  power  to  extend  bank  credit  or  withold 

101 


102  THE  STRANGLE  HOLD 

it,  the  variations  in  volume  are  today  entirely  in  the 
hands  of  the  bankers. 

Since  the  power  to  refuse  or  to  grant  a  loan  determines 
the  volume  of  the  medium  of  exchange,  the  elasticity  of 
that  medium  depends  upon  this  power. 

We  have  here  the  kernel  to  the  solution  of  one  part 
of  our  problem.  This  power,  to  grant  or  refuse  a  loan, 
must  be  so  placed  that  it  will  operate  only  when  business 
demands  it.  It  must  operate  so  that  the  medium  of  ex- 
change will  always  be  there  for  use  when  trade  and 
industry  demand  it.  The  question  of  whether  a  loan 
should  be  granted  or  refused  should  be  answered  only  by 
the  demands  of  business  in  such  a  way  that  tlie  medium 
of  exchange  will  vary  in  volume  directly  as  the  amount 
of  business  offered  may  vary. 

As  begins  now  to  be  clear,  and,  as  will  be  shown  more 
forcefully  very  soon,  the  arrangement  necessary  to  ac- 
complish the  desired  end,  involves  the  taking  of  the 
power  to  decide  loans  out  of  private  hands. 

Confidence  in  bank  credit  depends  upon  the  security 
behind  the  loans  made  by  the  banks  and,  therefore,  the 
methods  used  in  granting  loans  determines  the  amount 
of  confidence  or  safety  in  our  medium. 

When  people  know  that  there  is  full  value  behind  any 
medium  of  exchange,  then  they  are  willing  to  accept  it 
at  full  value. 

"VMien  they  do  not  know  whether  or  not  there  is  full 
value  behind  it,  they  are  always  in  fear  of  it  or  they 
will  accept  it  only  at  a  lesser  rate,  depending  upon  the 
degree  of  certainty  or  uncertainty. 

This  lack  of  knowledge  as  to  what  is  behind  bank 


100%  SAFETY  AND  ELASTICITY        103 

credit  is  the  reason  why,  when  anything  occurs  to  shake 
the  confidence  of  the  people,  they  rush  to  withdraw  their 
deposits  from  the  banks.  They  feel  uncertain  as  to  the 
value  behind  their  money  in  the  form  of  bank  deposits, 
or  bank  credit,  whereas  they  always  feel  perfectly  cer- 
tain about  the  value  of  gold. 

It  follows,  from  the  foregoing,  that  if  people  could  be 
made  to  feel  quite  certain  that  there  is  full  value  behind 
every  dollar's  worth  of  bank  credit  demand  would  never 
be  made  for  payment  of  bank  deposits  in  money.  The 
people  would  accept  it  at  full  value  without  fear,  and 
panics  and  bank  runs  would  be  abolished. 

With  one  hundred  per  cent  confidence  in  bank  credit 
gold  reserves  and  in  fact  no  legal  reserves  would  be 
necessary. 

The  remedy  involves,  then,  the  substitution  of  a  more 
logical  security  than  the  promise  to  pay  gold  as  the 
value   behind   the    medium   of    exchange   in    circulation. 

This  security  must  be  of  such  a  value  as  will  bring 
with  it  absolute,  one  hundred  per  cent  confidence  in  the 
medium,  so  that  it  will  always  be  acceptable.  People 
must  never  feel  doubtful  as  to  the  likelihood  of  their 
getting  value  in  return  for  it. 

These  principles  then,  are  the  general  points  that  are 
to  guide  us  in  fitting  the  remedy  to  the  conditions  re- 
quiring reform. 

For  greater  convenience  in  proceeding,  we  may  divide 
the  process  of  creating  the  medium  of  exchange,  bank 
credit,  into  three  steps  or  phases. 

The  first  phase  is,  whether  the  credit  shall  be  created 
or  not,  whether  the  loan  shall  be  advanced  or  not. 


104  THE  STRANGLE  HOLD 

The  second  step  is  the  appraisement  of  the  value  of 
the  security  offered  for  the  loan. 

The  third  step  is  to  determine  what  percentage  of  the 
appraised  value  can  be  safely  loaned  against  the  security. 

These  demarcations  are  not  very  important  in  them- 
selves. All  the  steps  are  always  present  in  making  a 
loan,  but  they  are  not  clearly  marked  off  from  each 
other.  However,  owing  to  the  greater  ease  and  simplicity 
of  dealing  with  the  problem  in  this  manner,  we  may  fol- 
low the  demarcation,  keeping  in  mind  that  it  is  neither  a 
very  pronounced  nor  a  very  important  one. 

Our  present  method  of  issuing  bank  credit  is  as  fol- 
lows: 

When  a  person  applies  to  a  bank  for  a  loan,  the  first 
thing  the  banker  does  is  to  appraise  the  security.  Since 
this  is  the  customary  order,  we  will  discuss  this  step  first. 

In  the  case  of  personal  property  the  value  is  easily 
ascertained  from  market  reports  or  discount  sheets,  but 
in  many  cases  an  appraisement  of  real  property  is  but 
a  guess  at  the  value,  and  a  one-sided  guess  at  that.  Not 
only  does  the  result  depend  upon  the  banker's  limited 
information,  but  his  self-interest,  personal  friendship 
and  prejudices,  may  also  enter  into  the  transaction.  In 
fact  some  loans  are  made  without  security.  The  public 
knows  that  these  conditions  exist  and,  consequently,  the 
people  cannot  have  full  confidence  in  the  medium  of 
exchange  that  is  created  by  the  loan. 

Here,  then,  we  see  the  first  particular  need  of  reform 
and  that  is  in  the  matter  of  appraising  the  value  of  the 
security  offered  for  the  loan. 

At  this  point  we  may  recall  the  banker's  set  formula. 


100%  SAFETY  AND  ELASTICITY         105 

"The  security  is  good  but  not  bankable."  Our  first  step 
is  to  ascertain  just  how  good  the  security  is  and  t'lls 
must  be  determined  in  such  a  way  that  every  member 
of  the  community  will  accept  the  appraisement  of  the 
security  as  being  the  true  value. 

Our  system  must  be  such  as  will  determine  the  true 
value  of  every  kind  of  property,  both  real  and  personal, 
and  the  method  used  must  be  such  as  will  impress  the 
people  with  the  fact  that  it  is  the  real  value.  Every 
member  of  the  community  must  accept  and  believe  in 
every  security  and  every  good  security  must  be  a  bank- 
able security. 

The  farmer's  land,  the  merchant's  goods  and  the  bond 
holder's  bonds,  must  all  be  equally  "liquid"  and  all 
equally  acceptable  as  security  for  a  bank  loan;  the 
percentage  of  the  loan  to  the  value  depending  on  the 
stability  of  the  value  of  the  security  offered,  that  is  on 
the  fluctuation  in  its  price. 

Now  it  so  happens  that  we  already  have  two  separate 
systems  of  public  appraisal  which  cover  all  property. 
With  a  slight  and  simple  change  in  one  of  these  systems 
they  both  become  excellently  adapted  to  the  appraisal 
of  securities  oIFered  for  bank  loans.  And  at  the  same 
time  by  the  change  in  one  of  these  systems  it  will 
operate  all  the  more  satisfactory  in  its  present  field. 

Practically  all  personal  property  such  as  stocks,  bonds, 
wheat,  cotton,  leather,  etc.,  is  appraised  every  day  by 
sales  on  the  various  exchanges  or  in  the  markets  where 
such  goods  are  handled.  The  actual  value  is  established 
daily  and  the  price  is  published  so  this  system  needs  no 
revision. 


106  THE  STRANGLE  HOLD 

And,  as  every  taxpayer  knows,  the  machinery  for  the 
public  appraisement  of  all  private  property  operates 
throughout  the  country.  All  private  property  is  ap- 
praised for  taxes  by  the  public  assessor.  It  is  true  that 
this  system  at  present  has  its  faults.  In  some  parts  of 
the  country  it  is  laxly  or  unfairly  regulated  and  admin- 
istered. In  others,  however,  it  is  carefully  handled. 
With  a  slight  change  in  state  laws,  which  will  place  no 
added  burden  on  the  taxpayers,  the  assessor's  records 
can  be  made  to  serve  with  entire  satisfaction  in  the  ap- 
praisal of  securities,  not  otherwise  appraised.  And  what 
is  more,  these  records  will  on  that  account  become  the 
more  accurate  and  satisfactory  as  a  basis  of  taxation. 

It  is  obvious  that,  at  present,  it  is  to  the  personal 
interest  of  the  tax-payer  to  have  as  low  a  valuation  as 
possible  placed  upon  his  property,  since  a  low  assess- 
ment cuts  down  the  amount  of  taxes  he  has  to  pay.  And 
even  though  he  be  perfectly  honest,  the  desire  to  save 
taxes  will  nevertheless  have  a  tendency,  even  if  an  un- 
conscious one,  to  make  him  lower  the  valuation. 

Precisely  the  opposite  is  the  case,  on  the  other  hand, 
when  the  property  holder  is  seeking  to  obtain  a  loan 
from  the  bank  with  the  same  property  as  security.  Then 
his  interest  is  to  make  the  valuation  as  high  as  possible, 
thereby  increasing  the  loan  that  he  may  negotiate  upon 
it  as  a  basis. 

It  follows  then  that  if  the  same  appraisal  is  used 
to  determine  the  value  of  property  both  for  one  purpose 
and  for  the  other,  the  two  conflicting  tendencies  will 
operate  against  and  so  neutralize  each  other. 

In  consequence  of  this  conflict  the  very  force  of  self- 


100%  SAFETY  AND  ELASTICITY         107 

interest  will  be  the  cause  of  a  just  valuation.  For  as  a 
tax-payer  the  property-holder  will  seek  the  lowest  valu- 
ation, and  as  a  person  desiring  a  loan  the  same  property 
holder  will  seek  the  highest  valuation.  Where  one  valu- 
ation is  made  to  serve  for  both  purposes,  the  conflicting 
tendencies  will  counteract  one  another,  and  a  fair  or  just 
valuation  must  be  the  result. 

The  tax  laws  generally  provide  that  property  shall  be 
assessed  at  its  "true  value."  At  present  the  value  of 
property  for  tax  purposes  is  set  arbitrarily  by  the 
assessor,  and  is  subject  to  revision  only  by  a  board  of 
equalization. 

This  method  of  appraising  property  is  fiilly  as  re- 
liable as  the  method  of  appraisement  used  by  a  bank. 
However,  in  neither  case  is  the  true  value  arrived  at. 
Both  systems  are  based  on  the  opinions  or  guesses  of  a 
few  men,  whose  views  are  often  colored  by  prejudice, 
personal  interest,  and  favoritism. 

A  system  for  the  appraisal  of  securities  for  bank  loans 
must  be  entirely  beyond  the  reach  of  any  personal  in- 
terest or  human  weakness.  Guess  work  and  prejudice 
must  be  overcome  and  it  must  be  made  apparent  to  the 
whole  community  that  the  true  value  has  been  de- 
termined. 

Now,  as  we  have  just  seen,  if  valuations  given  on  the 
tax-rolls  were  made  to  serve  as  valuations  of  security 
for  bank  loans,  tax-payers  and  borrowers,  caught  be- 
tween their  conflicting  interests,  would  strike  a  mean, 
or  true,  value.  Over-valuing  the  property  would  secure 
no  advantage  to  a  borrower,  for  the  banker  would  insist 
on  cutting  down  the  amount  loaned — the  percentage  of 


108  THE  STRANGLE  HOLD 

the  loan  to  tlie  value.  The  net  result  of  over-valuing 
then  would  only  tend  to  a  loss  for  the  property  owner 
through  increased  taxes. 

Under-valuing  would  cease  also,  for  since  the  tax  rate 
is  fixed  by  dividing  the  amount  to  be  raised  for  govern- 
ment purposes  by  the  whole  amoimt  on  the  assessment 
roll,  under-valuation  would  be  of  no  advantage  to  the 
community,  for  it  would  result  only  in  raising  tlie  tax 
rate  and  would  not  affect  tlie  amount  paid  as  taxes. 

Assessment  values  mean  comparatively  little  today 
but,  if  those  values  were  to  become  the  true  value  and 
were  accepted  as  such  by  the  banks  and  the  community 
it  would  be  a  very  different  situation.  Comparison  of 
value  is  so  easy  that  the  boosting  of  value  by  the  would- 
be  borrower  and  the  under-rating  of  the  tax  evader  would 
cease. 

The  effect  of  the  slight  change  suggested  would  be 
very  far  reaching.  It  would  compel  honesty  and  square 
dealing.  Personal  interest  would  force  the  community 
as  a  whole  to  give  its  support  to  an  honest  valuation  of 
all  property  for  all  purposes. 

It  is  a  matter  of  common  knowledge  that  there  is  no 
system  of  appraisement  in  use  today  which  can  be 
relied  upon  to  give  the  true  value  of  real  property  for 
any  purpose.  However,  by  a  slight  change  involving  no 
expense,  the  tax  system  of  any  state  can  be  made  to  de- 
termine the  true  value  on  every  piece  of  property  both 
for  tax  and  security  purposes. 

Self  interest  operates  automatically  so  the  result  of 
all  the  interests  in  the  community  operating  at  once 
would  give  an  impersonal  or  automatic  result. 


100%  SAFETY  AND  ELASTICITY         10» 

The  legislation  necessary  to  establish  a  system  which 
would  secure  an  automatic  appraisement  acceptable  as 
a  basis  for  loans  is  quite  simple. 

Existing  law  provides  that  an  aggrieved  taxpayer 
may  submit  his  grievance  to  the  board  of  equalization  and 
review  for  adjustment.  However,  the  result  of  an  ap- 
peal to  this  board  at  the  present  time  is  seldom  satis- 
factory, and  if  the  complainant  succeeds  in  getting  the 
relief  sought  it  does  not  accrue  to  the  benefit  of  those 
who  do  not  complain.  Justice  is  consequently  not  at- 
tained. 

But  were  a  law  adopted  which  would  make  the  assessed 
value  of  a  property  also  its  security  value,  the  tincer- 
tainty  and  injustice  in  our  present  method  of  levying 
taxes  would  be  rectified.  Personal  interest,  as  we  have 
seen,  would  soon  fix  the  true  value  of  every  property. 

The  assessor  today  is  placed  in  a  peculiar  position. 
The  law  says  he  must  assess  all  property  at  the  "true" 
value,  but  taxpayers  are  always  seeking  low  assessments, 
and  there  is  no  way  to  determine  the  true  value,  so  the 
assessor  while  in  a  difficult  position  exercises  a  more 
or  less  arbitrary  power. 

The  assessor's  difficulties  as  well  as  his  arbitrary  pow- 
er can  both  be  done  away  with  by  giving  the  taxpayer  a 
right  to  appeal  from  his  assessment  and  also  from  the 
decision  of  the  board  of  equalization.  A  practical  meth- 
od of  hearing  this  appeal  and  deciding  the  question  will 
be  shown  later.  And  what  is  still  another  good  point 
about  this  suggestion,  the  change  that  would  have  to  be 
made  necessitates  only  a  trifling  one  in  existing  law,  and 
involves   no   dangerous   experiment.      The  only   radical 


110  THE  STRANGLE  HOLD 

thing  about  the  whole  affair  would  be  in  the  result,  which 
would  be  a  very  radical  change  for  the  better  in  all  coa- 
ditions  affected. 

Let  us  suppose  that  a  law  were  enacted  making  tiae 
assessed  value  of  every  property  also  its  value  as  a 
security,  and  a  taxpayer  then  felt  a  grievance  over  the 
assessment — ^he  felt  that  an  incorrect  valuation  had  been 
placed  upon  his  property,  either  for  the  purpose  of  pay- 
ing taxes  or  of  securing  a  loan,  that  is,  he  thought  it 
was  assessed  either  too  high  or  too  low. 

The  legal  remedy  now  would  be  to  appeal  from  the 
assessor's  decision  to  the  board  of  equalization  and  re- 
view for  relief.  Under  the  methods  in  use  today  the 
relief,  if  any,  obtained  from  this  board  is  seldom  satis- 
factory but,  with  a  slight  change  in  existing  law,  perfect 
satisfaction  could  be  assured.  The  true  value  of  every 
piece  of  property  for  both  tax  and  security  purposes 
could  be  obtained  with  little  trouble. 

Give  to  every  taxpayer  the  further  right  to  appeal 
from  the  decision  of  the  board  of  equalization  and  re- 
view. Then  pass  a  law  authorizing  the  clerk  of  the 
board  of  equalizati&n  to  subpoena  witnesses,  call  jurors 
and  conduct  hearings.  Then  if  the  board's  decision 
should  fail  to  satisfy,  the  aggrieved  tax-payer  or  ap- 
plicant for  a  loan  he  would  have  the  right  to  appeal 
from  the  board's  decision  and  have  the  value  of  his 
property  fixed  by  a  jury. 

Only  those  especially  qualified  should  be  eligible  as 
jurors.  If  personal  property  is  to  be  appraised  this 
qualification  should  include  only  such  as  are  well  versed 
in  the  value  of  the  kind  of  property  in  question.     In 


100%  SAFETY  AND  ELASTICITY         111 

the  case  of  real  property,  it  should  include  only  those 
who  ovm  property  of  the  same  kind,  or  similar  property 
in  the  neighborhood.  A  two-thirds  verdict  of  such  a  jury 
of  arbitration  would  settle  the  dispute. 

The  right  to  submit  all  questions  of  assessment  to  such 
a  jury  would  entirely  overcome  all  arbitrary  power  of 
the  assessor  and  completely  do  away  with  the  present 
inefficiency  of  the  board  of  equalization.  Without  doubt 
the  decision  of  such  a  jury  could  be  relied  upon,  because 
the  jurors,  being  property  owners  themselves,  would  be 
deciding  the  value  of  their  own  property  by  their  verdict. 
Self  interest  would  dictate  the  verdict. 

The  owners  of  similar  property,  who  did  not  want 
to  sell  their  property  or  borrow  money  on  it,  would 
naturally  favor  a  low  valuation  in  order  to  cut  down 
their  taxes;  while  on  the  other  hand,  those  who  did 
want  to  sell  or  borrow  would  be  inclined  to  favor  a 
higher  valuation. 

Again,  we  have  a  conflict  of  personal  interest,  and 
once  more  the  result  of  this  conflict  would  be  a  more 
just  valuation. 

This  conflict  of  personal  interest  among  the  jurors 
would  compel  a  compromise  in  the  verdict  such  as  would 
result  in  showing  the  true  value  of  the  property.  It 
would,  consequently,  be  a  guarantee  of  justice  to  all, 
both  to  borrowers  and  taxpayers.  Taxation  and  loans 
would  both  be  on  the  "True  value." 

Here,  then,  we  already  have  the  machinery  for  ap- 
praising property  which,  with  only  a  few  slight  changes, 
could  be  used  most  satisfactorily  in  obtaining  a  proper 
and  just  valuation  of  all  property.     It  would  supply  a 


112  THE  STRANGLE  HOLD 

long  felt  want  for  reliable  appraisement  for  all  purposes, 
especially  for  real  property. 

And  the  publicity  of  this  appraisal,  together  with  the 
acquiescence  of  the  public  in  its  result,  would  cause  en- 
tire public  confidence  to  be  placed  in  the  medium  of 
exchange,  the  bank  credit,  which  would  be  created  aa  a 
result  of  the  ensuing  loan. 

While  this  method  of  appraisal  would  apply  more 
particularly  to  real  property,  we  have  another  system  of 
machinery,  as  previously  stated,  already  in  operation 
which  would  continue  to  determine  the  valuation  of  mcst 
personal  property.  The  values  set  by  it  would  be 
accepted  just  as  they  are  now. 

It  is  a  matter  of  common  knowledge  that  the  price 
of  practically  all  property,  except  real  estate,  is  set  every 
day  in  the  various  central  markets  such  as  the  stock  ex- 
change, cotton  exchange,  wheat  pit,  and  the  wholesale 
and  packing  house  districts.  These  prices  are  printed 
daily  on  the  financial  pages  of  every  metropolitan  news- 
paper and  are  generally  accepted  by  the  banks  and 
everyone  else  as  the  true  value. 

Prices  of  manufactured  products  are  to  be  found  in 
the  price  lists  and  discoimt  sheets  of  manufacturers  and 
jobbers. 

For  all  personal  property,  therefore,  there  would  be 
little  need  to  institute  an  assessment,  board  of  equaliza- 
tion and  a  jury  to  fix  a  valuation.  We  already  have  a  sys- 
tem of  machinery  which  fixes  the  true  value  of  such  prop- 
erty every  day.  Under  our  proposed  system  we  would 
take  these  valuations  as  the  security-value  for  bank 
loans,  the  same  as  they  are  now  taken. 


100%  SAFETY  AND  ELASTICITY         113 

At  present  these  values  are  affected  by  the  contrac- 
tion and  expansion  of  the  medium  of  exchange  but,  since 
our  remedy  would  entirely  do  away  with  the  fluctuation 
of  the  value  of  the  dollar  due  to  such  phenomena,  the 
value  of  all  property  would  then  be  much  more  stable. 

It  is  very  probable  that  the  need  for  appraisals  of 
real  property  by  jury  would  also  soon  diminish.  In 
order  to  settle  real  estate  values,  several  arbitrations  in 
a  neighborhood  might  at  first  be  necessary,  but  they 
would  result  in  the  establishment  of  stable  values  which 
would  change  but  gradually. 

The  provision  which  requires  the  jurors  to  be  specially 
versed  in  the  value  of  the  kind  of  property  under  dis- 
cussion, or  to  be  owners  of  similar  property  in  the  same 
neighborhood,  would  secure  the  best  judgment  of  the 
community  as  to  value.  Afterwards  established  values 
would  be  constantly  checked  against  sales  and  net  in- 
comes. 

The  method  of  appraisal  suggested  here  as  applied 
to  real  property,  would  be  extended  so  as  to  cover  all 
property,  not  at  present  valued  in  a  satisfactory  way. 
This  method  of  appraisement,  by  opposing  the  personal 
interests  of  the  whole  community  to  the  personal  in- 
terests of  the  individual,  makes  itself  proof  against  in- 
dividual favoritism.  It  rests  upon  the  solid' rock  of  the 
self-interest  of  the  majority,  and  consequently  the 
system  would  work  automatically. 

In  this  way  the  desired  result  would  be  obtained.  For 
with  such  publicity,  and  such  a  method  of  appraisal,  in- 
suring a  proper  valuation  of  all  property  used  as  se- 
curity against  which  bank  credit  could  be  issued,  the 


114  THE  STRANGLE  HOLD 

public  would  have  full  confidence  in  the  resulting  medium 
of  exchange. 

So  much  then  for  one  step,  the  safe  public  appraise- 
ment of  property  for  bank  loans.  Now  let  us  proceed 
to  the  next  step,  the  determining  of  the  percentage  of 
loan  to  value,  that  is  the  amount  which  could  be  loaned 
on  any  particular  kind  or  piece  of  property. 

Just  as  the  placing  of  the  actual  appraising  of  prop- 
erty in  public  hands  would  give  public  confidence  to  the 
resulting  valuation,  so  would  placing  the  authority  to 
say  on  what  terms  a  bank  may  make  a  loan  and  how 
much  it  may  lend  on  any  property.  This  fixing  of  the 
percentage  of  the  loan  is  a  simple  matter  and  requires 
neither  technical  knowledge  nor  special  information. 

The  relative  safety  of  various  securities  is  quite  well 
established.  The  less  the  fluctuation  in  the  price  of  a 
securit)^,  the  safer  it  is  as  a  basis  for  a  loan,  and  con- 
sequently, the  higher  should  be  the  percentage  of  the 
loan  to  the  actual  appraised  value. 

Thus  good  bonds,  and  business  property  in  well  estab- 
lished communities  come  under  the  heading  of  gilt  edged 
security,  and  command  the  highest  percentage.  From  this 
mark,  which  may  run  as  high  as  eighty  or  even  ninety, 
the  percentage  will  shade  down  to  twenty  or  even  ten 
per  cent  on  a  hazardous  security. 

Here  again  the  proposed  plan  would  involve  no  great 
change  in  present-day  methods,  except  to  the  extent  of 
taking  the  determining  of  this  percentage  out  of  the 
private  hands  of  the  banker,  and  placing  it  in  public 
hands.  By  so  doing  we  would  do  away  with  favoritism 
and  at  the  same  time  insure  the  safety  of  the  loan  and> 


100%  SAFETY  AND  ELASTICITY         115 

consequently  gain  public  confidence  in  the  resulting  me- 
dium, the  bank  credit  that  is  created  by  the  loan. 

What  is  required  in  this  phase  of  the  matter  of  crea- 
ting bank  credit,  then,  is  a  proper  authority  in  whose 
hands  may  be  placed  the  function  of  establishing  a  table 
of  percentages  of  loan^  to  value  for  various  kinds  of 
property. 

This  duty  would  not  call  for  expert  knowledge.  The 
present  banking  practice,  which  is  the  result  of  experi- 
ence, would  be  a  sufficient  and  a  safe  guide  for  the  au- 
thority to  whom  this  duty  might  be  intrusted.  And  the 
advantage  of  such  a  method  would  rest  not  only  in  its 
simplicity  but  in  the  fact  that,  since  the  resulting  per- 
centages would  be  determined  publicly  and  would  have  to 
be  published,  everyone  would  become  familiar  with  them. 

If  they  should  be  placed  too  high  the  banks  would 
not  make  the  loans  and  if  they  were  too  low  those 
affected  would  agitate  until  they  were  raised.  These  per- 
centages would  have  to  be  fixed  at  a  point  where  both 
bankers  and  the  public  would  agree  that  they  were  safe 
and  just.  The  public  would  then  have  full  confidence  in 
the  bank  credit  issued  for  all  would  know  there  was 
ample  security  behind  every  bank  loan. 

And  once  more  we  find  that  we  have  a  system  of  ma- 
chinery for  this  operation  also,  that  is  already  at  hand, 
and  which,  with  a  few  changes,  can  be  admirably  adapted 
to  the  new  purpose. 

The  banking  laws  of  the  nation  and  of  the  various 
states  now  provide  a  public  authority  whose  duty  it  is  to 
supervise  the  banks  established  imder  those  laws.  In  the 
hands    of   this    authority,   whether   a   Federal    Reserve 


116  THE  STRANGLE  HOLD 

Board,  or  a  State  Superintendent  of  Banks,  we  find  the 
proper  place  to  entrust  the  power  and  duty  now  under 
consideration. 

The  plan  needs  little  explanation.  It  consists  mainly 
in  giving  to  the  public  authority  the  right  to  regulate 
bank  loans  which  would  include  the  power  to  determine 
the  percentage  the  loan  may  bear  to  the  valuation  set 
on  the  security ;  these  percentages  would  be  set  by  means 
of  rules,  which,  of  course,  must  be  general  in  application 
and  should  be  published  before  becoming  operative. 

The  rules  to  be  made  by  the  public  board  would  be 
suggested  by  the  present  banking  system  and  should 
follow  the  best  banking  practice,  and  be  changed  only  as 
experience  dictates. 

Special  interests  could  not  be  favored,  for  all  rules 
would  have  to  be  general  and  would  have  to  be  published. 

We  have  now  dealt  with  two  of  the  three  phases  of 
extending  loans  and  so  creating  bank  credit,  the  medium 
of  exchange.  We  have  seen  that  the  solution  in  each 
case  involves  the  placing  of  the  fixing  of  value,  and  of 
the  loanable  percentage  of  all  property  in  public  hands 
in  such  a  way  as  to  insure  both  just  methods  and  public 
confidence. 

Now  let  us  look  into  the  third  phase,  that  of  granting 
or  refusing  a  loan. 

The  authority,  to  say  yes  or  no  to  a  would-be  borrower, 
now  rests  entirely  with  the  bank.  And  so  long  as  it  is 
left  entirely  to  the  judgment  of  private  persons  it  will 
be  tinged  with  favoritism. 

If  a  man  complies  with  the  rules  for  the  use  of  any 
other  public  utility,  he  is   entitled  to  impartial  treat- 


100%  SAFETY  AND  ELASTICITY         117 

ment.  If  he  buys  a  railway  ticket  he  has  the  right  to 
ride  regardless  of  whether  the  conductor  favors  or  dis- 
likes him. 

To  accomplish  justice,  so  that  all  may  use  this,  the 
greatest  of  all  oiir  public  utilities,  upon  fair  and  equal 
terms,  the  final  power  of  granting  or  denying  the  use  of 
the  medium  should  then  also  be  enforced  by  public 
authority  and  applied  impartially  to  all  applicants. 

The  question  is  likely  to  arise — Do  not  the  banks  com- 
pete with  each  other  in  getting  business,  and  is  not  lend- 
ing money  the  most  important  source  of  bank  revenues; 
therefore,  do  not  bankers  exercise  the  greatest  liberality 
in  their  dealings  with  borrowers,  vmless  perhaps  in  a 
remote  community  controlled  by  a  narrow-minded 
banker  ? 

The  answer  to  this  question  is  in  the  negative.  The 
objection  will  seem  valid  only  to  the  uninitiated  person 
who  has  never  done  business  with  banks.  For  the  truth 
is  that  banks  do  not  compete  in  making  loans.  Take 
the  case  of  a  business  man,  for  instance,  who  has  a  going 
business  and  desires  a  loan.  He  approaches  the  First 
National  Bank  say  with  which  he  has  an  account.  The 
bank  officials  may  have  been  offended  by  his  political 
activities  or  business  methods,  or  his  interests  may  run 
counter  to  those  of  some  of  the  bank  directors.  So  he  is 
informed  that  the  bank  is  not  prepared  to  extend  its 
loans. 

Knowing  that  he  is  deserving  of  credit,  the  business 
man  then  goes  to  the  Merchant's  National  Bank  and  ap- 
plies for  a  loan.  He  is  asked  by  officials  there  who 
his  bankers  are.    When  the  answer  is  made  that  he  has 


118  THE  STRANGLE  HOLD 

been  doing  business  with  the  First  National,  the  reply 
to  his  application  for  a  loan  will  probably  be  the  stereo- 
typed one:  "We  would  appreciate  your  business,  but  it 
is  against  our  policy  to  open  an  account  with  a  loan." 

The  foregoing  is  but  a  single  instance  of  the  dis- 
crimination which  prevails  in  the  matter  of  extending  or 
refusing  bank  loans,  and  so  of  permitting  or  denying 
the  use  of  the  medium  of  exchange,  under  our  present 
system  of  unrestricted  private  control.  The  removal  of 
this  discrimination  is  possible  only  by  placing  the  use 
of  the  medium  of  exchange  under  public  control. 

However,  public  control  of  bank  loans  should  not  be 
effected  in  any  such  manner  as  to  hurt  the  banks,  or 
to  take  just  profits  or  powers  away  from  the  banker. 
Any  reform  should  be  dictated  solely  by  the  desire  to 
make  the  bank  more  serviceable  to  the  community. 

The  only  object  of  any  suggested  change  should  be 
to  secure  the  fair  and  equal  use  of  the  medium  of  ex- 
change, upon  safe  and  equal  terms,  by  all  members  of  the 
community  who  can  comply  with  the  conditions  and  pay 
for  the  privilege  of  using  it.  While  divesting  the 
banker  of  all  power  to  show  favoritism  he  must  be  left 
free  to  protect  himself  against  loss  and  should,  there- 
fore, be  assisted  in  making  all  loans  safe.  He  should 
be  encouraged  to  refuse  a  loan  so  long  as  there  is  any 
doubt  as  to  its  safety,  but  he  must  not  be  permitted  to 
refuse  one  on  any  other  grounds. 

Bankers  are  inclined  to  lay  stress  on  the  "moral 
hazard"  of  a  loan  which  suggests  that  some  men  are 
more  reliable  than  others.  The  fact  that  there  is  a 
difference  in   reliability  among   men    may  be   admitted 


100%  SAFETY  AND  ELASTICITY         119 

but  that  the  banker  has  any  means  of  knowing  which 
are  and  which  are  not  reliable  is  not  admitted. 

His  surmise  in  this  direction  is  due  altogether  too 
much  to  favoritism  or  personal  interest.  And  even  if 
the  banker  were  infallible  and  did  know  who  are  and 
who  are  not  reliable  all  loans  must  not  only  be  safe 
beyond  question,  but  the  people  must  know  they  are 
safe.     There  is  therefore,  but  one  basis,  safe  security. 

The  safety  of  our  medium  of  exchange  is  a  matter 
of  such  importance  to  all  that  we  cannot  let  it  rest 
even  in  a  slight  degree  on  the  guess  of  anyone  as  to 
the  reliability  of  a  borrower.  "Moral  hazard,"  while 
not  denied,  must  be  disregarded. 

The  present  practice  of  banks  lending  without  security 
to  those  well  and  favorably  known  to  them  could  prob- 
ably be  continued  under  proper  restrictions  provided  the 
bank  does  not  lend  in  this  way  more  than  the  bank's 
paid  up  capital  and  surplus. 

The  capital  and  surplus  of  the  bank  may  be  con- 
sidered as  private  property  and  subject  to  private  con- 
trol the  same  as  other  private  funds.  If  the  stockhold- 
ers see  fit  to  give  the  bank  management  the  right  to 
exercise  their  judgment  as  to  "moral  hazard"  up  to 
the  amount  of  the  capital  and  surplus  that  may  be  con- 
sidered a  private  matter. 

But  when  the  bank  goes  beyond  its  capital  and  sur- 
plus in  making  loans  it  becomes  a  public  matter,  for  the 
bank  is  then  trading  solely  on  public  laws  and  public 
confidence.  It  is  performing  a  public  function,  that  of 
issuing  our  medium  of  exchange,  and  favoritism  must 
be  eliminated. 


120  THE  STRANGLE  HOLD 

For  its  own  protection,  and  in  order  to  insure  safety 
to  our  medium  of  exchange,  every  bank  must  be  allowed 
to  refuse  loans  under  certain  conditions.  But  in  order 
to  guard  against  imreasonable  refusals,  resulting  only 
from  personal  prejudice,  partiality  or  personal  interest, 
the  banks  should  be  required  to  give  with  all  refusals 
a  written  statement  of  their  reasons  for  such  refusal. 
The  borrower  should  then  be  given  a  chance  to  remove 
the  objections  or  to  protest  this  refusal  before  the  pub- 
lic bank  supervising  authority,  and  if  it  should  appear 
that  the  loan  was  refused  for  any  other  reason  than  to 
guard  against  a  bad  loan  the  bank  should  be  severely 
penalized. 

If  found  necessary  to  insure  fairness  to  all,  the  bor- 
rower might  be  given  the  right  to  go  direct  to  the 
Federal  Reserve  Bank  when  refused  by  private  banks. 

Here,  then,  we  have  all  three  phases  of  making  a 
loan  covered  by  adequate  remedies. 

In  effect,  the  remedy,  as  we  have  suggested  it,  would 
be  to  take  out  of  private  hands  and  place  under  public 
control  the  right;  first,  to  determine  the  value  of  the 
property  offered  as  security  for  the  loan;  second,  the 
right  to  determine  the  percentage  of  the  loan  to  the 
value  of  the  security;  and  third,  the  right  to  refuse  or 
grant  the  loan,  so  that  all  may  have  the  use  of  the 
medium  of  exchange  on  exactly  the  same  terms. 

In  the  foregoing  pages  it  has  been  clearly  established 
that  bank  loans  are  not  a  personal  matter  between 
the  banker  and  the  borrower  because  they  effect  the 
welfare  of  the  whole  community. 

It,  therefore,  follows  that  their  use  is  a  public  right 


100%  SAFETY  AND  ELASTICITY        121 

and  all  must  be  entitled  to  enjoy  that  right  upon  fair 
and  equal  terms,  and  no  one  should  be  given  an  un- 
fair preference,  or  receive  any  unjust  advantage. 

Let  us  see  how  this  plan  would  fulfill  the  two  re- 
quirements we  have  seen  to  be  essential  to  an  ade- 
quate system  of  exchange;  first,  stability  through  proper 
elasticity,  and  second,  acceptability  through  public  con- 
fidence. 

In  the  first  place,  the  medium  of  exchange,  would, 
under  the  proposed  plan,  vary  according  to  the  needs  of 
business.  For,  since  the  determination  of  the  volume  of 
the  medium  of  exchange  would  no  longer  be  in  the 
hands  of  private  persons,  the  restriction  on  that  medium, 
which  we  have  seen  inevitably  accompanies  private  con- 
trol would  no  longer  exist.  The  use  of  the  medium  of 
exchange  would  be  a  RIGHT  and  not  a  PRIVILEGE 
as  it  is  now.  Every  one  who  could  comply  with  the 
requirements  would  have  equal  opportunity  to  use  the 
bank  when  and  as  desired.  In  other  words,  contraction, 
through  private  control,  would  not  occur. 

And  on  the  other  hand,  inflation  would  not  exist 
either.  For  the  plan  would  involve  the  necessity  of  hav- 
ing adequate  security  behind  each  loan,  and,  therefore, 
bank  loans  would  not  be  extended  beyond  the  needs  of 
business.  No  one  would  borrow  unless  he  expected  to 
profit  by  so  doing. 

And,  as  we  have  seen,  public  confidence  in  bank  credit 
would  exist  to  one  hundred  per  cent.  Public  appraisal 
of  the  value  of  security  and  the  fixing  of  the  percentage 
of  the  loan  would  result  in  certainty  that  there  was  full 
value  behind  every  loan  extended. 


122  THE  STRANGLE  HOLD 

There  would  then  be  no  necessity  for  gold  reserves  or 
any  other  reserve  to  bolster  confidence  in  the  banks.  The 
fallacy  of  the  gold  reserve  and  the  fiction  that  bank 
credit  calls  for  money  could  be  discarded.  Public  con- 
fidence in  the  banks  would  be  gained  and  held  by  the  fact 
that  every  bank  loan  was  amply  secured  and,  conse- 
quently, every  bank  deposit  was  perfectly  safe. 

The  only  reform  suggested  here  comes  to  the  simple 
proposition  of  changing  the  basis  of  our  medium  of  ex- 
change so  that  it  will  rest  on  the  truth  and  good  security, 
instead  of  on  a  false  promise  of  gold  redemption  and  a 
fictitious  reserve. 

The  point  cannot  be  too  strongly  emphasized  that 
there  is  no  change  suggested  in  the  whole  system  except 
a  change  of  base,  from  one  of  fallacy  and  fiction  to  one 
of  truth  and  honesty.  The  few  details  necessary  to 
make  the  suggested  change  are  simple  and  practical,  and 
are  now  well  understood.  That  the  remedy  would  prove  a 
complete  cure  for  our  present  ills,  is  evident,  for  it  com- 
pletely overcomes  the  defects  in  the  present  system.  The 
proposed  method  of  dealing  with  bank  loans  would  put 
100%  safety  and  100%  elasticity  into  our  medium  of 
exchange. 

A  further  advantage  is  that  the  changes  necessary 
to  accomplish  this  end  are  but  slight.  They  involve, 
as  we  have  seen,  but  a  few  changes  in  present  laws  to 
alter  existing  institutions  to  a  slight  extent. 

With  laws  in  effect  to  accomplish  the  foregoing  plan, 
the  method  of  obtaining  a  loan  from  a  bank  would  be 
practically  the  same  as  now.  The  rules  laid  down  by 
the  public  authority  would  in  all  probability  preserve 


100%  SAFETY  AND  ELASTICITY         123 

the  present  banking  practice  regarding  loans  on  business 
statements  and  personal  property  in  toto.  About  the 
only  change  in  the  making  of  such  loans  would  be  that 
all  applicants  would  receive  the  same  treatment. 

Most  business  would  be  conducted,  just  as  at  present, 
but  with  much  greater  certainty  and  satisfaction  to  both 
borrower  and  banker.  Business  men  could  at  all  times 
know  just  what  amount  of  credit  they  were  entitled  to 
use  and  bankers  would  know  that  every  loan  they  made 
was  safe.  Such  a  system  would  do  away  with  the  great- 
est source  of  business  worry  for  all. 

Through  the  suggested  method,  the  procuring  of  real 
estate  loans  would  be  greatly  simplified  as  well  as 
hastened  and  cheapened.  The  borrower  would  get  from 
the  office  of  the  Assessor  a  certificate  setting  forth  the 
assessed  value  of  the  property  which  he  proposed  to  use 
as  security.  This  "certificate  of  assessment"  would  set 
forth  the  ownership,  the  location,  the  amount  and  the 
value  of  the  property. 

By  multiplying  the  value  of  the  property  as  set  forth 
in  this  certificate  of  assessment,  by  the  percentage  as 
given  in  the  official  table  of  loan  value,  the  loanable 
value  of  any  security  would  be  obtained  and  every  per- 
son would  know  what  amount  could  be  borrowed  from  a 
bank  at  any  time. 

For  instance,  suppose  the  security  to  be  offered  were 
a  farm  of  one  hundred  acres.  The  owner  would  get  from 
the  Assessor's  office  his  assessment  certificate  which 
would  show  his  farm  was  assessed  at  say  $150  per  acre. 
Let  us  say  the  percentage  established  for  such  property 
were  60%.   The  appraised  value  of  the  farm  would  then 


124  THE  STRANGLE  HOLD 

be  100x150  or  $15,000  and  the  loan  obtainable  on  it 
would  be  60%  of  $15,000  or  $9,000. 

Or  say  the  security  were  six  automobiles  priced  at 
$2,000  each.  Then  the  six  would  be  worth  6x2000  or 
$12,000.  Now,  suppose  that  such  security  were  listed 
as  being  good  security  for  50%  of  its  value.  Then  the 
owner  of  the  machines  would  be  ent'Llcd  to  borrow  from 
the  bank  50%  of  $12,000  or  $6,000  on  a  bill  of  lading 
or  a  proper  warehouse  receipt. 

In  either  case,  when  the  borrower  presented  his  notes 
and  security  to  the  bank  in  proper  form,  the  loan  would 
be  made.  If  it  were  not  made,  the  banker  would  have 
to  state  in  writing  why  he  refused  to  grant  it.  No  trivial 
reason  would  be  acceptable,  and  if  a  good  reason  ex- 
isted, it  would  be  against  public  policy  for  the  loan  to 
be  made  until  the  objection  were  removed. 

The  rules  laid  down  would  of  course  provide  for  the 
discounting  of  acceptances,  etc.,  and  of  automobile  and 
other  paper  on  whatever  terms  have  been  found  safe,  so 
that  the  various  selling  plans,  which  have  been  built  up, 
could  be  used  without  interruption. 

There  is  no  suggestion  of  any  new  way  of  making 
loans  or  the  use  of  any  business  forms  or  methods  not 
now  in  vogue. 

No  bank  should  be  compelled  to  make  a  loan  unless 
the  security  were  proven  good  and  on  the  other  hand 
any  bank  which  persistently  refused  to  make  a  loan 
because  of  personal  feeling  should  have  its  charter 
annulled.  Good  security  for  every  loan  and  no  favorites, 
shoxild  be  an  invariable  rule. 

The  object  of  public  control  of  the  medium  of  ex- 


100%  SAFETY  AND  ELASTICITY         125 

change  would  always  be  to  facilitate  and  not  to  hamper 
business.  Experience  would  probably  develop  many  im- 
provements on  present  methods  but  we  must  not  lose 
sight  of  the  fact  that  the  first  requisite  of  a  medium  of 
exchange  is  acceptability  and  that  depends  on  its  safety. 

This  statement,  however,  does  not  mean  that  bet- 
ter methods  than  those  in  use  may  not  be  developed. 

For  instance,  it  would  not  be  out  of  place  to  make 
mercantile  agencies  such  as  Dun  and  Bradstreet  public 
institutions.  By  so  doing  their  records  would  be  more 
valuable  to  the  business  world.  By  extending  these  rec- 
ords to  take  in  the  work  of  merchants  associations,  those 
who  do  not  pay  their  bills  as  well  as  those  who  deal  dis- 
honestly could  be  eliminated  from  the  community. 

If  paying  one's  debts  and  honest  dealing  were  neces- 
sary as  a  qualification  for  the  use  of  credit  it  would  put  a 
very  high  premium  on  honesty.  At  least  the  community 
could  be  put  on  its  guard  against  those  who  did  not  pay 
their  debts  or  deal  fairly. 

This  idea  is  not  suggested  as  being  at  all  necessary 
to  this  plan  for  putting  bank  credit  under  public  control 
but  is  merely  offered  as  an  improvement  on  present 
conditions  which  might  be  considered  later. 

By  making  all  bank  loans  conform  to  the  rules  laid 
down  by  a  public  authority,  and  by  basing  them  on  se- 
curity which  the  people  themselves  have  appraised,  every 
bank  depositor  would  know  that  every  loan  made  by 
every  bank  was  good.  By  this  means  we  would  secure 
to  our  medium  of  exchange  the  maximum  of  safety  and 
also  the  maximum  of  elasticity. 

Thus  a  medium  of  exchange  would  result  that  would 


126  THE  STRANGLE  HOLD 

fulfill  all  the  functions  required  of  it.  No  longer  would 
it  be  a  hindrance  to  commerce  and  industry,  but  rather 
the  help  it  should  be. 

Production  and  trade  would  be  allowed  to  expand  to 
their  fullest  extent,  for  they  would  control  the  medium 
of  exchange  instead  of  that  utility  controlling  them,  and 
the  results  would  be  beneficial  to  all. 

Private  control,  which  now  has  an  automatic  tendency 
to  cause  our  medium  of  exchange  to  contract  and  strangle 
business  as  soon  as  prosperity  makes  a  demand  for 
credit,  would  be  gone.  Prices  would  remain  stable 
except  when  affected  by  the  laws  of  supply  and  demand. 

Business  would  no  longer  be  a  gamble  and  success 
would  depend  on  efficiency  and  hustle  and  not  on  chance 
or  a  pull  with  the  banker. 

A  period  of  prosperity  would  not  be  followed  by  one 
of  depression ;  all  branches  of  industry  could  be  financed ; 
foreign  trade  could  be  carried  to  any  degree  of  safety; 
our  shipping  business  would  be  rehabilitated  and  recon- 
struction would  bring  peace  and  prosperity  to  a  troubled 
world.  All  the  changes  made  would  help  not  alone  this 
country  but  all  humanity. 

And  the  advantage  accruing  from  the  fact  that  the 
changes  required  are  but  slight  cannot  be  over-empha- 
sized. The  real  change  would  be  in  the  improved  con- 
ditions which  would  follow  as  a  result  of  the  change 
and  which  would  be  to  the  benefit  of  all  concerned,  except 
perhaps  to  a  few  who  are  today  holding  an  unfair 
advantage  over  their  fellow-men. 

The  laws  necessary  in  order  to  bring  about  the  desired 
change  are  given  at  length  in  the  next  chapter.    These 


100%  SAFETY  AND  ELASTICITY         127 

laws  are  presented  in  legal  form  in  order  to  show  how 
easily  the  reform  may  be  put  into  effect,  and  in  order 
to  point  out  definitely  the  way  in  which  all  the  desired 
advantages  can  be  secured,  so  that  our  social  system  will 
be  freed  from  many  of  the  evils  that  hamper  and  oppress 
it  today. 


CHAPTER  VIII 
BREAKING  THE  STRANGLE  HOLD 

WE  HAVE  now  pursued  our  problem  in  logical  or- 
der. Taking  up  the  known  defects  of  our  financial 
system,  as  related  to  our  industrial  and  social  life,  we 
have  shown  that  the  same  defect  which  has  always  ex- 
cluded the  farmer  and  has  recently  excluded  the  exporter 
from  the  use  of  the  bank  has  shut  the  bank  doors  on  the 
automobile  dealer  and  may  shut  it  on  other  industries 
at  any  time. 

It  has  been  shown  that  because  of  the  false  foimda- 
tion  of  our  system  of  credit — the  gold  standard — our 
present  day  industry  has  outgrown  the  system. 

The  gold  redemption  promise  has  outlived  its  useful- 
ness and  has  become  an  automatic  check  on  the  wheels  of 
industry. 

To  continue  to  confine  our  credit  system  by  a  false 
promise  to  redeem  in  gold  would  be  like  trying  to  carry 
on  the  industry  of  the  country  while  confining  our  trans- 
portation system  to  a  narrow  gauge  railroad.  And  then, 
if  private  ownership  of  banks  is  going  to  be  allowed  to 
deny  the  use  of  one  public  utility,  why  not  permit  those 
who  own  the  railroads  the  same  privilege.'' 

Such  an  arrangement  could  not  help  but  check  prog- 
ress and  cause  industrial  turmoil  and  social  unrest. 

Our  present  depressed  condition  is  brought  about 
through  industrial  progress  being  checked  for  want  of 
proper  credit  facilities. 

128 


BREAKING  THE  STRANGLE  HOLD     129 

We  have  already  noted  that  the  high  cost  of  living 
has  recently  been  considered  to  be  the  cause  of  bad  eco- 
nomic conditions  while  the  social  unrest  of  a  generation 
ago  was  believed  to  be  caused  by  the  low  cost  of  living. 
We  have  seen  that  these  conditions  refer  to  the  general 
price  level  and  are  due  to  increase  or  decrease  of  the  vol- 
ume of  the  medium  of  exchange  in  use.  We  have  noted 
from  our  own  experience  or  observation  that  high  prices 
stimulate  production  and  trade  while  low  prices  produce 
an  opposite  effect,  but  we  have  also  noted,  that  a  period 
of  high  prices,  good  business  and  prosperity  is  invariably 
followed  by  one  of  falling  prices,  business  failures  and 
economic  depression.  The  cause  of  this  phenomena  has 
been  definitely  pointed  out  and  has  been  shown  to  be  due 
to  defects  in  our  present  banking  system  arising  from  its 
private  control. 

Most  countries  have  passed  through  a  period  of  devel- 
opment where  the  mint  was  in  private  hands.  Only  in 
primitive  times  was  this  important  function  so  admin- 
istered and  while  it  was  in  private  hands  it  was  subject 
to  all  the  abuses  of  private  control  of  a  public  utility. 

As  a  nation,  we  outgrew  this  national  weakness,  while 
quite  young  so  its  bad  effects  are  not  remembered,  but 
Mexico,  during  the  long  period  of  internal  disturbances 
and  bad  government  preceding  the  period  of  Porfirio 
Diaz,  adopted  the  disastrous  plan  of  leasing  her  mints 
to  private  citizens. 

Freeing  his  country  from  the  tentacles  of  the  mint 
lessees  and  restoring  coinage  to  government  control  was 
one  of  the  greatest  reforms  carried  out  by  Diaz,  reaction- 
ary as  he  was  in  many  respects. 


130  THE  STRANGLE  HOLD 

Here  we  see  the  evils  of  private  manufacture  of  metal 
coins.  But  metal  coins  are,  in  our  modern  system,  but  a 
minute  part  of  the  entire  circulating  medium,  which  is 
almost  entirely  composed  of  the  credit  manufactured  by 
banks. 

Just  as  industrial  and  social  advancement  forced  the 
mint  out  of  private  into  public  hands  so  must  industrial 
progress  and  general  enlightenment  break  the  strangle- 
hold of  private  interests  on  our  individual  and  national 
life  by  substituting  public  for  private  control  of  bank 
credit. 

The  blighting  effect  of  private  control  of  this  greatest 
of  public  utilities,  on  both  private  and  public  interests 
has  been  demonstrated  many  times  and  must  not  be  lost 
sight  of. 

The  importance  of  the  medium  of  exchange  cannot  be 
over  estimated.  We  have  seen  that,  through  it,  by  the 
contraction  or  inflation  of  its  volume,  prices  fluctuate 
and  with  them  fluctuates  the  value  of  our  pay  check, 
our  property  and  our  fortunes.  As  prices  fluctuate  so 
fluctuates  our  standard  of  living,  our  comforts,  our  hap- 
piness and  our  whole  aspect  of  life.  Nothing  then  can 
be  of  more  importance  to  us  as  individuals  and  as  citi- 
zens than  this  matter  of  the  medium  of  exchange. 

It  is  because  of  the  importance  of  the  money  function 
that  coinage  has  always  been  considered  a  government 
duty  and  privilege.  No  privately  issued  medium  could 
gain  and  hold  public  confidence.  Without  confidence  the 
medium  would  not  be  accepted  so  it  failed  in  efl5ciency 
as  an  exchange  medium  in  the  same  proportion  as  it 
lost  public  confidence. 


BREAKING  THE  STRANGLE  HOLD       131 

History  taught  the  business  world  that  the  medium  of 
exchange  must  not  only  hold  public  confidence  but  it 
also  taught  that  a  mixed  coinage  within  the  same  coun- 
try checks  material  progress  just  as  effectually  as  the 
confusion  of  tongues  checked  the  building  of  the  Tower 
of  Babel. 

A  uniform  medium  is  necessary  for  commercial  devel- 
opment and,  therefore,  it  should  have  but  one  source  of 
issue  and  that  should  be  through  the  government.  Be- 
cause of  this  knowledge,  gained  through  human  experi- 
ence, the  Constitution  of  the  United  States  reserved  to 
the  Federal  government  the  right  to  coin  money.  At  the 
same  time  it  jealously  guarded  this  right  when  it  denied 
that  privilege  to  the  several  States. 

Section  8,  Article  1,  of  the  Constitution  says:  "The 
Congress  shall  have  power  ...  to  coin  money  and 
regulate  the  value  thereof"  and  Section  10  of  the  same 
article  provides  that,  "No  State  shall  .  .  .  coin 
money;  emit  bills  of  credit;  make  anything  but  gold 
and  silver  coin  a  tender  in  payment  of  debts."  There  is 
no  other  reference  to  money  or  to  the  medium  of  ex- 
change in  the  Constitution. 

That,  by  the  foregoing,  the  framers  of  the  Constitu- 
tion intended  to  reserve  to  the  Federal  government  the 
sole  right  of  money  issue  seems  quite  plain  and  the 
general  opinion  is  that  our  government  really  does  issue 
the  medium  of  exchange. 

We,  however,  have  seen  clearly  that  this  is  not  the 
case.  We  have  seen  that  while  the  banks  do  not  "coin 
money"  they  do  issue  and  control  our  medium  of  ex- 
change which  is  the  very  function  the  Constitution  by  the 


132  THE  STRANGLE  HOLD 

foregoing  provision  intends  to  reserve  to  the  National 
government. 

The  proviso  that  no  state  shall  coin  money  or  issue 
bills  of  credit  makes  it  quite  plain  that  the  framers  of 
the  basic  law  intended  to  reserve  the  money  function  to 
the  Federal  government.  Otherwise  the  proviso  would 
reserve  only  the  right  to  coin  the  change  while  the 
banks  issue  our  money. 

If  private  institutions  are  permitted  to  issue  their 
credit  to  be  used  as  a  medium  of  exchange  why  should 
not  the  state  or  the  counties  or  for  that  matter,  the  vari- 
ous cities  have  the  same  privilege.'* 

How  can  government  officials  justify  the  present  prac- 
tice of  permitting  private  institutions  to  issue  credit  to 
be  used  instead  of  money  in  the  face  of  this  prohibition 
against  permitting  the  states  to  coin  money  or  to  issue 
bills  of  credit? 

The  state's  credit  is  certainly  superior  to  that  of  any 
bank,  because  the  state  possesses  the  right  to  tax  the 
bank  as  well  as  other  property  within  its  boundaries  and 
a  state's  promise  to  pay  is  a  mortgage  on  all  the  prop- 
erty within  its  confines,  including  that  of  the  bank.  If 
no  state  may  coin  money  or  "emit  bills  of  credit,"  cer- 
tainly no  corporation,  the  existence  of  which  depends 
upon  state  law,  should  be  permitted  to  exercise  this  func- 
tion either  directly  or  indirectly. 

It  is  equally  certain  that  a  national  bank,  being  a  pri- 
vate institution,  has  no  better  constitutional  standing 
than  the  state  bank  as  a  source  of  money  issue.  The  fact 
that  it  is  incorporated  under  a  national  law  or  that  the 
medium  of  exchange  it  issues  is  called  "Credit"  instead 


BREAKING  THE  STRANGLE  HOLD       133 

of  money,  or  coin,  or  currency,  gives  it  no  right  to  usurp 
an  exclusive  government  function. 

Consequently,  it  is  plain  that  it  was  never  contem- 
plated by  the  framers  of  the  Constitution,  nor  is  it  now 
intended,  that  the  circulating  medium  of  this  country 
should  have  any  source  of  issue  other  than  that  of  the 
Federal  government.  Regardless  of  these  facts  and  of 
these  provisions  we  find  that  because  of  the  constant  in- 
crease of  the  banking  habit,  all  of  our  medium  of  ex- 
change today,  except  the  small  change,  is  issued  by 
private  institutions. 

In  plain  but  unmistakable  language  the  constitution 
reserves  to  the  Federal  Government  alone  the  right  to 
issue  money  and  prohibits  the  states  from  so  doing  but, 
notwithstanding  this  direct  reservation  and  prohibition, 
state  banks  as  well  as  national  banks  are  substituting 
their  credit  to  be  used  as  money. 

It  has  already  been  shown  that  this  is  issued  by  the 
bankers  entirely  at  their  will.  In  other  words,  com- 
mercial development  has  substituted  the  credit  of  pri- 
vate institutions  for  a  medium  of  exchange  controlled  by 
the  government  and  by  reason  of  this  substitution  the 
banks  have  usurped  the  most  important  government 
function.  It  is  impossible  to  reconcile  this  state  of 
affairs  with  the  provisions  of  our  Federal  Constitution 
or  with  common  sense.  Our  present  practice  then  is 
without  doubt  in  violation  of  the  basic  law  of  the  land. 
Notwithstanding  these  constitutional  provisions  it  will 
be  shown  in  a  later  chapter,  devoted  to  the  Federal 
Reserve  System,  how  Congress,  through  the  Federal 
Reserve  Act,  even  went  so  far  as  to  put  the  credit  of 


134  THE  STRANGLE  HOLD 

the  United  States  behind  the  personal  judgment  and 
private  interests  of  the  bankers  with  the  avowed  pur- 
pose of  turning  their  credit  into  government  currency, 
thus  aiding  and  abetting  this  illegal  practice. 

Other  attempts  to  use  a  privately  issued  medium  of 
exchange  have  been  suppressed  by  the  government.  In 
those  instances  the  substitutes  for  money  which  were 
used  had  no  camouflage  to  conceal  their  true  nature,  so 
they  were  plainly  violations  of  the  constitution  and  our 
coinage  laws.  But  the  fiction  by  which  the  banker 
credits  the  borrower  with  a  deposit  has  concealed  the 
true  nature  of  bank  credit  and  permitted  it  not  only  to 
nullify  this  provision  of  our  fundamental  and  statute 
law  but  even  to  command  the  aid  of  Congress  in  so 
doing. 

No  one  can  be  blamed  for  this  state  of  affairs  for  it 
comes  about  because  of  the  general  misconception  con- 
cerning our  money. 

All  public  officials,  however,  are  sworn  to  uphold  the 
constitution  and  laws  so  when  this  violation  is  clearly 
shown,  as  it  has  been,  it  now  becomes  their  sworn  duty 
to  see  that  the  violation  of  the  Constitution  is  stopped. 

It  has  already  been  shown  that  it  will  not  be  a  diffi- 
cult task  to  recover  the  money  function  to  the  govern- 
ment. No  court  proceedings  will  be  necessary.  The 
remedy  is  constructive  not  destructive. 

By  a  few  slight  changes  in  existing  laws  we  can 
comply  with  the  Constitution  and  restore  the  money 
issuing  power  to  the  people. 

We  have  seen  how  this  result  can  be  accomplished 
by  a  few  simple  changes  without  upsetting  the  present 


BREAKING  THE  STRANGLE  HOLD       135 

system  of  banking  or  changing  our  manner  of  doing 
business,  and  without  any  risk  of  political  inefficiency  or 
of  personal  loss. 

A  few  words  written  into  the  Federal  Reserve  Act 
would  give  the  Federal  Reserve  Board  power  to  define 
the  securities  on  which  and  the  manner  in  which  banks 
may  make  loans.  Since  the  Federal  Reserve  Board  is  a 
government  institution,  like  the  United  States  Mint,  our 
medium  of  exchange  would  then  be  issued  under  Federal 
authority  and  the  constitutional  provision  for  Federal 
control  of  our  money  or  medium  of  exchange  would  be 
satisfied. 

With  the  Constitution  thus  enforced,  all  institutions 
that  accept  deposits  and  grant  credit  including  state 
banks  and  trust  companies,  should  be  compelled  to  be- 
come members  of  the  Federal  Reserve  system. 

The  rules  laid  down  by  this  public  authority  would 
then  unify  our  medium  of  exchange  and  give  public 
control  to  our  greatest  public  utility. 

Besides  such  adjustments  as  would  take  from  the 
banker  the  arbitrary  power  to  refuse  loans  for  purely 
personal  reasons,  we  should  do  away  with  unnecessary 
reserve  restrictions  and  the  regulations  that  prohibit 
national  banks  from  making  loans  on  land. 

With  the  suggested  change  in  the  Federal  Reserve  Act 
accomplished,  the  states  in  self  defence  would  be  com- 
pelled to  make  modifications  in  their  appraisement  ma- 
chinery, so  as  to  adjust  the  assessor's  office  to  the  fixing 
of  values  of  property  on  which  loans  might  be  sought 
from  the  banks.  Not  a  difficult  task  as  has  been  shown 
and  will  be  sho^vn  more  definitely  later  on. 


136  THE  STRANGLE  HOLD 

The  reform  should  be  national  because  the  Federal 
government  should  control  the  money  function.  How- 
ever, it  is  not  necessary  to  await  congressional  action. 
It  may  be  accomplished  through  the  state  banking  sys- 
tem, and,  by  bringing  pressure  on  the  Federal  govern- 
through  the  states,  national  action  will  follow. 

Every  state  has  its  banking  department  under  one  op 
more  state  officials.  We  here  suggest  a  model  law  by 
which  any  state  may  take  control  of  the  issuance  of  bank 
credit  under  the  state  banking  system. 

The  state  banks  would  still  violate  the  spirit  of  the 
constitution,  but  not  in  as  great  a  degree  as  the  present 
practice. 

To  secure  public  control  of  the  state  banking  system 
we  suggest  as  an  amendment,  which  will  fit  into  the  code 
of  practically  any  state,  the  following: 

The  State  Banking  Department  shall,  and  there  is 
hereby  vested  in  it,  the  power  to  make  and  publish 
such  rules  and  regulations  and  define  such  terms  as 
in  its  judgment  may  seem  wise  and  expedient  for  the 
government  of  all  banking  corporations,  which  rules 
and  regulations  shall  be  general  and  shall  not  conflict 
with  any  of  the  laws  of  this  state  or  of  the  United 
States;  but  which  SHALL  DEFINE  THE  SECUR- 
ITY ON  WHICH,  AND  THE  MANNER  IN 
WHICH,  SUCH  CORPORATIONS  MAY  MAKE 
LOANS  AND  INVESTMENTS  OR  BECOME 
LIABLE  ON  ACCEPTANCES  OR  OTHER  EVI- 
DENCE OF  DEBT:  provided,  however,  that  no  such 
corporation  shall  be  compelled  to  make  any  loan  or  in- 
vestment, nor  become  liable  on  any  obligation  or  other 


BREAT^L.G  THE  STRANGLE  HOLD      137 

undertaking  against  its  will ;  nor  shall  any  such  corpo- 
ration have  any  claim  against  the  state  banking  de- 
partment or  a  member  thereof  or  against  the  State  for 
any  loss  which  it  may  sustain  because  of  any  of  the 
rules  and  regulations  so  made  and  published.  It  shall 
be  the  duty  of  said  department  at  each  regular  meet- 
ing and  at  any  special  meeting  called  for  that  purpose 
to  examine  all  reports  made  by  said  corporations  re- 
lating to  their  condition,  and  all  reports  of  regular 
and  special  examinations  made  by  the  state  examiner 
and  deputy  examiners  and  filed  with  said  department 
during  the  preceding  quarter  or  such  period  as  shall 
have  elapsed  since  the  last  meeting  of  said  department 
and  to  approve  or  disapprove  the  same,  and  to  make 
and  enforce  such  orders  as,  in  its  judgment  may  be 
necessary  or  proper  to  protect  the  public  and  particu- 
larly the  depositors  or  creditors  of  said  institutions. 
Said  department  and  the  state  examiner  and  deputy 
examiners  shall  have  the  power  to  subpoena  witnesses, 
administer  oaths,  and  generally  to  do  and  perform 
any  and  all  acts  and  things  necessary  to  the  complete 
performance  of  the  duties  herein  imposed,  and  to 
enforce  all  of  the  provisions  of  this  act  and  for  the 
purjDOse  of  enabling  them  to  perform  all  the  duties 
imposed  upon  them,  the  provisions  for  such  purposes 
shall  be  held  as  applicable  to  their  proceedings.  Any 
and  all  orders  made  by  said  department  shall  be  im- 
mediately operative  and  may  be  enforced  by  a  court 
of  competent  jurisdiction.  ^aid  department  shall 
keep  a  full  and  complete  record  of  all  its  proceedings 
and  of  all  orders  made  by  it,  and  the  records  of  the 


138  THE  STRANGLE  HOLD 

state  banking  department  of  the  state  examiners  and 
of  any  and  all  reports  made  by  or  filed  with  the  depart- 
ment or  the  state  examiner,  shall,  under  proper  re- 
strictions, during  regular  business  hours,  be  open  to 
inspection  and  examination. 

The  object  sought  by  such  a  law  is  to  standardize  the 
security  on  which  banks  may  make  loans,  so  as  to  prevent 
discrimination  and  also  to  assure  the  public  that  all  bank 
loans  are  made  on  safe  security  in  order  to  put  full  public 
confidence  behind  the  banks  and  keep  it  there. 

The  essence  of  the  whole  matter  is  but  a  slight  change 
in  the  present  practice  and  is  contained  in  the  first  few 
lines,  which  give  the  state,  through  public  officials,  power 
to  make  rules  defining  the  SECURITY  ON  WHICH 
AND  THE  MANNER  IN  WHICH  BANKS  MAY 
MAKE  LOANS. 

The  only  way  in  which  it  would  be  possible  for  the 
state  banking  department  to  profit  by  the  power  here 
granted  would  be  by  making  rules  that  would  be  satis- 
factory to  both  the  banks  and  the  people.  All  rules 
must  be  general  and  then  must  be  published,  so  no  per- 
sonal interest  in  the  public  control  could  possibly  be 
served.  The  powers  granted  the  state  authorities  are 
broad  enough  to  permit  them  to  annul  the  charter  of  a 
bank  that  would  persist  in  refusing  loans  on  personal 
grounds. 

Through  public  control  all  arbitrary  power  would  be 
wiped  out  and  each  element  in  the  community,  by  look- 
ing after  its  own  interest,  would  check  up  and  balance 
the  whole  system. 

Should  the  public  authority  which  makes  these  rules. 


BREAKING  THE  STRANGLE  HOLD       139 

deem  it  advisable,  banks  might  be  left  free  to  loan  the 
amount  of  their  unimpaired  capital  without  restriction. 

As  a  means  of  explaining  favoritism  to  certain  bor- 
rowers bankers  have  put  forth  the  idea  that  personality 
enters  largely  into  the  making  of  loans.  Some  men, 
they  say,  are  worthy  of  a  loan  without  security.  This 
no  doubt  is  true,  and  since  the  capital  of  the  bank  may 
be  looked  on  as  private  property,  the  public  authority 
making  the  rules  might,  if  it  thought  best,  allow  the 
banker  to  exercise  his  judgment  or  we  should  better  say 
show  his  favoritism  to  the  extent  of  the  bank's  capital 
but  not  beyond  that. 

As  soon  as  the  banker  in  making  loans  goes  beyond 
the  bank's  capital  and  surplus  he  is  trading  on  public 
confidence  and  that  belongs  to  the  people,  so  it  must  be 
treated  as  public  property. 

The  values  of  stocks  and  bonds  are  fixed  daily  by  the 
dealings  on  the  stock  exchange  and  of  practically  all 
commodities  by  transactions  in  the  various  marts  of  trade 
such  as  the  wheat  pit,  cotton  exchange,  etc. 

While  real  estate  values  are  to  a  degree  fixed  by  net 
income  and  occasional  sales  we  must  have  a  sure  method 
of  fixing  such  values. 

As  explained  in  the  last  chapter  this  object  woidd  be 
accomplished  by  making  the  assessed  value,  that  is  the 
value  placed  on  the  property  by  the  assessor  for  tax  pur- 
poses, also  the  appraised  value  which  the  banks  must 
accept  as  the  security  value. 

The  following  laws  are  for  the  purpose  of  arriving  at 
the  true  value  of  all  assessable  property.  By  the  oper- 
ation of  these  suggested  laws  we  would  not  only  arrive 


140  THE  STRANGLE  HOLD 

at  a  safe  basis  of  security  for  bank  loans,  but  we  would 

put  our  assessments  for  taxation  on  a  just  and  fair  basis. 

The  two  following  suggested  laws  explain  themselves: 

AN  ACT 
To  provide  for  the  hearing  of  grievances  caused  by 
assessments  for  taxation  and  for  appeals  from  the  de- 
cision of  boards  of  equalization  and  review. 

BE  IT  ENACTED  by  the  Legislative  Assembly  of 
the  State,  etc.,  or  whatever  the  enacting  clause  may  be: 
Section  1.  Any  person  being  aggrieved  by  the 
return  of  any  assessor  of  this  State  may  submit  such 
grievance  in  writing  to  the  clerk  of  the  proper  board 
for  the  equalization  and  review  of  such  assessment  not 
later  than  five  days  after  the  regular  first  meeting  day 
of  such  board;  no  such  statement  of  grievance  shall 
be  ignored  by  said  board  for  lack  of  form,  nor  for 
any  other  reason,  provided,  it  is  signed  by  the  party 
aggrieved  or  by  some  other  person  in  his  behalf,  but 
all  such  complaints  shall  be  taken  up  and  decided  by 
the  board  without  delay;  should  the  complainant  or 
any  other  person  be  aggrieved  by  the  decision  of  any 
board  of  equalization  or  review  an  appeal  may  be 
taken  by  such  party  by  filing  a  notice  of  appeal  with 
the  clerk  of  said  board  and  the  payment  to  the  clerk 
of  the  required  fee  within  three  days  after  the  rendi- 
tion of  such  decision ;  when  an  appeal  is  taken  under 
this  section  it  shall  be  the  duty  of  said  board  to  sub- 
mit all  questions  in  dispute  to  a  jury  of  arbitration 
as  in  such  cases  provided. 

Section  2.    .For  the  purpose  of  enabling  all  boards 


BREAKING  THE  STRANGLE  HOLD      141 

of  equalization  and  review  and  the  clerks  of  said 
boards  to  perform  all  the  duties  imposed  upon  them 
they  shall  have,  and  the  power  is  hereby  given  them, 
to  subpoena  witnesses,  call  jurors,  administer  oaths 
and  to  do  and  perform  any  and  all  acts  and  things 
necessary  to  the  complete  performance  of  such  duties. 


To  provide  for  a  jury  of  arbitration  and  to  regulate 
appeals  from  the  decision  of  boards  of  equalization 
and  review  the  following  is  suggested. 

AN  ACT 

To   provide   for  juries   of   arbitration   in   assessment 
cases. 

Enacting  clause  according  to  the  state: 

Section  1.  All  juries  of  arbitration  in  cases  where 
an  appeal  is  taken  from  the  decision  of  any  board  of 
equalization  and  review  shall  be  composed,  drawn 
and  summoned  in  the  same  manner  as  juries  in  civil 
actions  in  justices'  courts,  except  that  the  clerk  of  the 
board  shall  act  instead  of  the  justice,  and  for  this 
purpose,  and  to  the  extent  necessary,  said  clerk  is 
hereby  given  all  the  power  and  authority  of  a  justice 
of  the  peace;  provided,  however,  that  for  juries  of 
arbitration  only  those  persons  shall  be  listed  or  called 
as  jurors  who  may  reasonably  be  supposed  to  possess 
accurate  knowledge  of  the  value  of  the  kind  of  prop- 
erty in  question,  or  who  are  ths  owners  of  the  same 
kind  or  similar  property  in  the  neighborhood  of  the 
property  imder  discussion. 

Section  2.     Fees  in  all  cases  for  service  on  a  jury 


142  THE  STRANGLE  HOLD 

of  arbitration  shall  be  the  same  as  in  civil  cases  in 
a  justice's  court  and  must  be  deposited  with  the  clerk 
before  the  jury  is  summoned. 

Section  3.  No  person  shall  act  on  more  than  one 
jury  of  arbitration  during  any  one  year,  but  there 
shall  be  no  other  grounds  for  challenge,  except  lack 
of  knowledge  of  the  value  of  the  property,  lack  of 
ownership  of  similar  property,  bias  or  undue  interest 
in  the  outcome  of  the  arbitration. 

Section  4.  As  soon  as  the  required  number  of 
jurors  are  selected  the  clerk  shall  administer  the  fol- 
lowing oath:  You  and  each  of  you  do  solemnly  swear 
that  you  will  render  a  verdict  according  to  your  best 
knowledge  and  belief. 

Section  5.  After  the  jurors  are  sworn  they  must 
sit  together  and  hear  the  allegations,  evidence  and 
argument,  which  must  be  delivered  in  public,  in  the 
presence  of  the  clerk  or  his  deputy  who  shall  conduct 
the  proceeding  as  nearly  as  may  be  in  accordance 
with  the  practice  of  the  District  court,  except  that 
the  jury  shall  be  given  until  two-thirty  P.  M.  of  the 
day  following  the  close  of  the  hearing  in  which  to 
render  a  verdict  and  the  jurors  shall  not  be  required 
to  stay  together  nor  to  refrain  from  talking  about  the 
matter  in  hand. 

Section  6.  Two-thirds  of  the  jury  must  agree  in 
order  to  render  a  verdict  which  must  be  in  writing 
and  signed  by  each  juror  agreeing  thereto  and  when 
so  signed  the  verdict  must  be  accepted  by  the  clerk 
and  the  jury  discharged;  provided  the  said  verdict 
definitely  settles  the  question  or  questions  submitted. 


BREAKING  THE  STRANGLE  HOLD       143 

and  as  regards  these  questions,  the  verdict  so  ren- 
dered shall  be  final,  and  shall  be  preserved  and 
treated  as  part  of  the  proceedings  of  the  board  of 
equalization  and  review. 

Section  7.  Any  juror  not  agreeing  to  the  verdict 
may  have  his  objections  thereto  recorded  with  the 
verdict,  and  any  juror  not  signing  the  verdict  or 
recording  his  signed  objections  thereto  shall  receive 
no  fees  or  other  compensation. 

Section  8.  Any  jury  failing  to  render  a  verdict 
within  the  time  specified  in  this  Act  shall  be  dis- 
charged and  no  fees  shall  be  paid  to  any  of  the 
members  thereof;  whereupon  the  clerk  shall  proceed 
to  draw  another  jury  without  delay  and  the  same  pro- 
cedure shall  be  had  until  a  verdict  is  rendered. 

Section  9.  No  verdict  nor  the  objections  thereto 
nor  any  record  of  the  proceedings  had  shall  be  added 
to,  subtracted  from  or  in  any  way  changed  after  the 
jury  has  been  discharged. 


Besides  the  foregoing  laws  there  should  be  introduced 
into  the  law  prescribing  the  duties  of  Assessors  a  provi- 
sion that,  on  application  of  or  on  an  order  from  the 
owner  of  any  property  on  the  assessment  roll,  the  asses- 
sor shall  furnish  a  "certificate  of  assessment"  in  the 
form  prescribed  by  the  State  or  National  Banking  De- 
partment. A  fee  may  or  may  not  be  charged  for  this 
service. 

While  no  law  which  will  fit  into  the  code  of  all  of 
the  States  can  be  laid  down  in  exact  terms,  the  fore- 
going  suggestions   carry   all   the   principles    which   are 


144  THE  STRANGLE  HOLD 

necessary  to  put  state  bank  credit  under  public  control, 
and  the  method  of  carrying  them  into  effect  has  been 
fully  explained  in  the  last  chapter. 

As  previously  stated,  the  national  banks  can  be 
brought  under  public  control  by  giving  to  the  Federal 
Eeserve  Board  the  same  power  over  member  banks  as  is 
given  over  state  banks  by  the  first  act  presented  here. 

This  can  be  accomplished  by  amending  the  Federal 
Reserve  Act  as  follows; 

To  Section  11  of  that  Act,  after  the  words,  "The 
Federal  Reserve  Board  shall  be  authorized  and  em- 
powered:" add  these  words: 

TO  DEFINE  THE  SECURITY  ON  WHICH, 
AND  TO  PRESCRIBE  THE  MANNER  IN  WHICH, 
MEMBER  BANKS  MAY  MAKE  LOANS  AND  IN- 
VESTMENTS OR  BECOME  LIABLE  ON  AC- 
CEPTANCIES  OR  OTHER  EVIDENCES  OF 
DEBT. 

To  fully  satisfy  the  constitutional  provision  for  Fed- 
eral control  of  the  medium  of  exchange  all  banks  should 
be  compelled  to  join  the  Federal  Reserve  system.  With 
these  two  suggestions  put  into  effect  each  state  should 
pass  the  suggested  laws,  providing  for  appeals  from 
boards  of  equalization  and  for  a  jury  of  arbitration. 
Practically  nothing  more  is  necessary  in  order  to  put  the 
control  of  the  money  function  into  public  hands. 

As  the  rules  governing  bank  loans  would  have  to  be 
published  and  would  apply  to  all  alike,  our  whole  finan- 
citl  system  would  then  be  unified.  Applications  for 
loans  would  be  treated  on  their  intrinsic  merits  without 
injustice  or  favoritism. 


BREAKING  THE  STRANGLE  HOLD   145 

This  object  can  be  accomplished  without  the  least 
upset  to  business  and  the  improvement  in  our  industrial, 
social  and  political  life  which  would  follow  the  change 
can  hardly  be  estimated. 

By  means  of  a  few  words  placed  in  the  Federal  Re- 
serve Act  the  basic  flaw  would  be  removed  from  our 
social  system;  our  constitutional  rights  would  be  re- 
gained and  the  last  vestige  of  privilege  would  be  de- 
stroyed. 

We  have  seen  how  the  use  of  a  commodity,  as  the 
medium  for  carrying  on  exchange,  subjects  all  trade  and 
through  it  the  productive  energy  of  the  community  to 
the  will  of  those  who  are  able  to  control  or  corner  that 
commodity. 

The  use  of  one  commodity  as  a  medium  of  exchange 
is  the  basic  flaw  in  our  civilization  which  has  hampered 
progress  and  stood  in  the  way  of  the  peace  and  happi- 
ness of  mankind  from  the  very  beginning  of  civilization. 

It  has  been  shown  that  when  the  commodity  itself  was 
DO  longer  used  as  a  medium  of  exchange  the  same  condi- 
tion was  continued  by  a  promise  to  pay  that  commodity. 

When  gold  could  no  longer  fulfill  requirements  as  a 
medium  for  carrying  on  trade  there  grew  up  a  custom 
of  using  for  that  purpose  a  promise  to  pay  gold.  And, 
although  this  promise  has  been  proved  false  by  panics 
and  the  many  subterfuges  used  to  escape  its  fulfillment, 
we  still  cling  to  it  without  justification  or  reason  as  a 
baby  clings  to  a  rattle. 

Through  the  use  of  a  commodity  as  a  medium  and  by 
confining  credit  to  a  promise  to  pay  that  certain  com- 
modity the  present  financial  system  gives  into  the  hands 


146  THE  STRANGLE  HOLD 

of  those  who  control  that  commodity  a  power  over  the 
daily  life  of  the  members  of  the  community  such  as  no 
political  ruler  ever  possessed. 

This  glaring  defect  in  the  very  foundation  of  the 
industrial  system  which  supports  civilization  seems  to 
have  been  overlooked  and  man  in  his  quest  for  liberty 
and  equality  has  always  directed  his  efforts  against 
political  instead  of  financial  rulers.  These  misdirected 
reforms  could  not  reach  the  goal  of  personal  liberty  and 
equality  for  they  were  not  aimed  at  the  power  that 
dictates  personal  welfare. 

Mankind  has  been  cheated  out  of  those  rights  which 
our  Declaration  of  Independence  says  are  inherent  and 
unalienable  by  the  financial  system  and  not  by  political 
government. 

As  long  as  the  money  function  is  performed  by  a 
certain  commodity  or  the  promise  to  pay  that  commodity 
or  as  long  as  the  control  of  credit  remains  in  private 
hands^  the  success,  prosperity  and  happiness  of  the  mem- 
bers of  the  community  will  be  at  the  mercy  of  the  few 
who  control  that  commodity  or  the  credit  resting  on  it. 

This  condition  has  been  felt  but  not  logically  and 
clearly  noted,  and  resentment,  though  not  clearly  defined, 
has  given  rise  to  such  terms  as  Financial  Oligarchy, 
Moneyed  Aristocracy,  Plutocrats,  etc. 

These  epithets  have  been  hurled  at  the  heads  of  prac- 
tically all  men  who  have  been  financially  successful; 
they  are  favorite  terms  with  certain  would-be  reformers 
and  the  purpose  of  their  use  is  to  excite  class  hatred. 

It  is  not  the  part  of  intelligence  to  blame  individuals 
for  the  faults  of  a  system. 


BREAKING  THE  STRANGLE  HOLD       147 

If  a  flaw  in  our  economic  system  makes  it  possible  for 
the  minority  to  gratify  a  natural  desire  for  power  at  the 
expense  of  the  majority  the  attack  should  be  on  the 
system  and  not  on  the  men  who  take  advantage  of  it. 

A  slight  change  in  existing  laws  will  cure  this  defect. 
The  improvement  in  national  efficiency  and  personal 
well-being  which  would  follow  the  change  would  be  im- 
mediate and  most  gratifying. 

There  would  be  a  decided  gain  in  business  freedom 
and  productive  energy,  because  the  medium  for  conduct- 
ing business  and  carrying  on  industry  would  be  open  to 
the  use  of  all.  Banks  could  then  grant  the  long  time 
credits  necessary  to  revive  our  foreign  trade. 

In  our  present  system  the  use  of  this  medium  is  re- 
stricted both  by  the  private  interests  in  control  and  by 
the  limitations  of  the  gold  reserve  requirements. 

We  might  in  a  measure  foresee  this  improvement  by 
noting  the  change  which  was  brought  about  by  placing 
the  railroads  under  public  control  through  the  interstate 
commerce  law.  This  comparison,  however,  is  not  a  fair 
one  for  several  reasons. 

For  instance  the  medium  of  exchange  is  a  much  more 
important  public  utility  than  the  railroads  and  enters 
more  intimately  into  the  life  and  activity  of  every  indi- 
vidual in  the  community.  Every  member  of  the  com- 
munity must  use  the  medium  of  exchange  and  all  are 
directly  affected  by  its  fluctuation  in  value. 

For  these  reasons  then,  the  abuses  due  to  its  private 
control  have  a  much  greater  effect  and  are  far  more 
harmful  though  not  so  easily  seen  as  these  incident 
to  railroad  control.     Finance  is  at  the  base  of  practically 


148  THE  STRANGLE  HOLD 

every  activity  of  life.  No  productive  enterprise  can  start 
or  continue  without  the  use  of  the  exchange  medium. 

It  has  been  shown  here  in  detail  how  the  fault  in  our 
system  can  be  removed.  To  follow  out  and  show  the 
changes  which  would  come  about  through  this  improve- 
ment in  our  system  is  unnecessary. 

It  is  enough  to  know  that  all  these  changes  would  be 
for  the  better.  This  must  follow  as  a  natural  result  for 
the  suggested  change  puts  into  effect  the  principles  on 
which  our  government  is  founded. 

Liberty  and  equality  are  the  inherent  rights  of  aU 
citizens  and  neither  can  exist  in  a  state  where  any  man 
or  set  of  men  controls  that  which  others  must  use. 

Bankers,  as  a  class,  are  prone  to  criticise  union  labor 
and  the  "closed  shop"  as  being  opposed  to  industrial 
progress  and  American  principles.  But,  may  we  ask, 
if  the  "closed  shop"  is  harmful  and  un-American,  how 
about  the  "closed  banlc".'' 

It  is  quite  evident  that  so  long  as  any  set  of  men 
possess  the  right  to  deny  to  other  men  the  use  of  that 
which  they  must  use  in  order  to  make  a  living  or  attain 
success  and  happiness  neither  liberty  nor  equality  can 
possibly  exist. 

A  system  which  practically  compels  the  banker  to 
refuse  the  use  of  the  medium  of  exchange  to  a  farmer 
who  by  every  right  is  entitled  to  use  it  and  then  permits 
that  banker  to  grant  its  use  to  the  speculator  for  the 
purpose  of  purchasing  and  holding,  for  profit,  the  farm- 
er's crop,  is  contrary  to  every  American  principle  and  to 
the  best  interests  of  every  citizen. 


BREAKING  THE  STRANGLE  HOLD       149 

That  our  present  system  is  inefficient,  unjust  and  un- 
American,  cannot  be  denied. 

Almost  every  economic  factor,  except  the  one  which  is 
the  real  cause,  has  been  blamed  for  our  present  ills  such 
as  trusts,  the  stock  exchange,  wheat  pit,  profiteering, 
labor  unions,  politics,  etc.  But  we  will  see  that  the  fault 
in  these  factors  is  really  due  to  the  bad  effects  of  a  de- 
fective system  of  exchange. 

It  will  be  shown  in  later  chapters  that  the  so  called 
"Trusts,"  for  instance,  are  not  the  villains  we  have 
thought  them,  but,  that  practically  all  the  villainy  is  the 
work  of  one  trust — ^the  "Money  Trust" — which  has 
finally  been  located  and  which  will  be  put  out  of  busi- 
ness when  the  remedy  here  suggested  is  put  into  effect. 

Industrial  turmoil  and  social  unrest  are  the  result  of 
the  money  power  holding  control  over  productive  enter- 
prise. Apply  the  "open  shop"  principle  to  the  bank. 
Open  the  bank  door  to  all  industry  and  keep  it  open. 
Stabilize  the  value  of  the  dollar,  and  the  chasm  between 
capital  and  labor  will  be  bridged. 

In  preceding  chapters  we  have  definitely  located  the 
two  glaring  defects  in  our  financial  system — private 
control  and  a  false  basis  for  credit.  We  have  also  dis- 
cussed in  sufficient  detail  a  remedy  which  is  practical,  and 
right  in  line  with  American  ideas  and  which  completely 
eradicates  these  defects  without  disturbing  business  or 
injuring  any  one.  When  this  simple  remedy  is  applied 
prosperity  will  be  restored  in  greater  measure  than 
was  ever  before  enjoyed  and  our  national  efficiency  will 
be  greatly  increased  as  will  be  shown  in  a  later  chapter. 


150  THE  STRANGLE  HOLD 

The  various  attempts  which  have  been  made  to  coun- 
teract the  bad  effects  of  these  two  weak  points  in  our 
system,  especially  the  Federal  Reserve  Act  and  the  Farm 
Loan  Act,  can  now  be  reviewed  in  a  different  light  than 
has  heretofore  been  applied  to  them. 

The  chapter  on  the  Federal  Reserve  System  will  war- 
rant special  attention  for  the  functions  of  that  institu- 
tion are  at  present  not  well  understood.  It  will  be 
shown  that  in  its  present  form  it  is  a  decidedly  un- 
American  institution. 

Some  of  the  mysteries  of  the  New  York  stock  ex- 
change will  be  cleared  up  in  the  chapter  on  "Specula- 
tion" and  "Foreign  Exchange"  will  be  explained  in  a 
chapter  under  that  title.  It  will  be  sho\vn  that  the 
faults  existing  in  these  various  economic  factors  will 
disappear  when  the  remedy  offered  is  applied. 

Since  the  need  for  reform  must  be  clearly  established 
before  asking  that  present  conditions  be  changed  the 
chapters  immediately  following  are  designed  to  show 
that  need. 

The  chapter  on  "Modern  Feudalism"  shows  how  un- 
American  our  present  system  is,  the  one  on  "Interest" 
shows  how  unjust  and  oppressive  it  has  been  and  can  be 
and  the  "Gold  Standard"  chapter,  by  using  the  words 
of  an  ex-Secretary  of  the  Treasury  shows  how  extremely 
false  it  is.  AMERICA  stands  for  just  the  opposite  of 
all  these  and  the  suggestion  here  is  to  Americanize 
America  by  making  our  financial  system  conform  to 
American  ideals. 


CHAPTER  IX 
MODERN  FEUDALISM 

EVERYBODY  is  more  or  less  familiar  with  the  his- 
torical epoch  known  as  the  Feudal  Era,  Every 
school  history  contains  a  discussion  of  it.  And  so  every- 
body will  perhaps  remember  how,  in  the  ancient  feudal 
states,  the  king  was  supposed  to  own  all  the  land;  how 
he  distributed  this  land  among  his  vassals,  lords  and 
dukes,  and  how  they  in  turn  divided  the  land  allotted  to 
them  among  their  own  vassals,  the  barons  and  knights; 
and  how  each  in  turn  acknowledged  the  authority  of  his 
immediate  master,  and  rendered  services  to  him. 

Below  these  various  layers  of  vassalage  and  sub- 
vassalage  were  the  common  people,  who  tilled  the 
soil,  and  supported  the  privileged  classes,  enabling  the 
latter  to  spend  their  time  in  feasting,  fighting  and  enjoy- 
ing life  generally. 

Such  a  system  was  one  of  a  bye-gone  era,  and  one 
that  has  long  passed  out  of  existence;  today  we  are 
supposedly  living  in  an  era  of  individual  liberty  and 
equality. 

And  yet,  when  one  looks  below  the  surface,  it  will 
be  seen — and  those  who  have  read  this  far  already  see — 
that  this  freedom  is  more  apparent  than  real.  For 
there  exists  in  our  financial  system,  the  most  important 
institution  of  today,  a  system  of  feudalism  which,  while 
less  obvious,  is  thereby  the  more  far-reaching. 

151 


152  THE  STRANGLE  HOLD 

With  regard  to  the  ownership  of  land,  and  the  con- 
trol of  it,  the  system  of  feudalism  has  long  passed  out 
of  existence,  but  it  finds  a  perfect  counterpart  ia  our 
present  banking  system. 

The  head  of  the  feudal  financial  state  resides  in  New 
York,  with  headquarters  in  Wall  Street;  the  dukedoms 
are  presided  over  by  the  banks  of  the  reserve  cities ;  the 
barons  and  knights  who  rule  the  lesser  cities  and  towns 
are  tributary  to  these  financial  powers;  and  just  as  in 
the  old  feudal  system,  the  people  though  no  longer  called 
serfs,  are  the  subjects  of  this  money  power. 

It  is  true  that  the  old  system  has  been  refined  some- 
what. The  autocrat  no  longer  has  the  power  to  chop 
ofi"  the  physical  head  of  an  inferior.  Instead  he  has 
the  right  only  to  cut  off  his  financial  head.  Instead  of 
having  the  right  to  imprison  his  serfs,  the  financial  lord 
has  the  power  only  to  withold  from  those  who  displease 
him  the  means  of  conducting  their  business.  That  is,  he 
shuts  the  bank  door  in  their  face  and  denies  them  the 
use  of  the  medium  of  exchange. 

This  change  is  a  refinement,  perhaps,  but  it  does  not 
help  to  free  the  serf.  For  in  denying  a  man  the  use  of 
the  greatest  public  utility,  which  is  the  means  of  car- 
rying on  his  business,  the  financial  master  can  cause  just 
as  much  loss  and  suffering  as  the  old  feudal  master 
could  through  a  more  apparent  power. 

Perhaps  the  newer  feudalism  has  been  made  less  hate- 
ful than  the  old,  since  the  outward  signs  rnd  symbols  of 
power  have  been  discarded.  Names  have  clisnged,  and 
we  no  longer  speak  of  king,  vassal,  and  serf.  The  vis- 
ible means  of  enforcing  the  master's  will  have  disap- 


MODERN  FEUDALISM  153 

peared,  and  our  financial  kings,  dukes,  and  barons  do 
not  parade  in  regal  costumes  and  waving  plumes.  And 
the  tokens  and  customs  of  serfdom,  the  forms  in  which 
the  serfs  acknowledged  openly  their  inferiority,  and  the 
supremacy  of  their  masters,  are  no  longer  required. 

But  for  all  this,  the  subjection  is  no  less  complete. 
Indeed,  on  account  of  its  invisibility  it  is  the  more 
dangerous ;  it  is  the  more  insidious.  For  the  present- 
day  tyrant  is  no  longer  responsible  to  the  court  of  public 
opinion.  Because  the  means  of  his  power  are  not  easily 
seen,  and  the  results  of  his  tyranny  will  be  charged  to 
other  causes,  he  can  use  his  power  in  the  most  cowardly 
way,  and  yet  escape  all  criticism.  He  can,  for  instance, 
cause  a  failure  in  business  by  withholding  deserved 
credit,  and  then  blame  the  failure  to  the  unbusinesslike 
methods  of  his  victim.  And  instead  of  being  censured 
for  such  an  act,  the  tyrant  is  praised  for  his  foresight 
and  wisdom. 

There  is  yet  another  way  in  which  this  modern  feu- 
dalism is  a  greater  burden  and  a  more  serious  danger 
than  was  the  old.  Under  the  old  system  the  interests  of 
master  and  serf  at  least  tended  in  the  same  direction. 
The  more  the  serf  produced,  the  more  the  master  could 
require  from  him,  and  so  they  both  desired  the  greatest 
production.  But  today  the  reverse  is  often  the  case,  for 
frequently  the  interest  of  the  financial  master  is  allied 
with  that  cf  the  speculator,  and  so  opposed  to  that  of 
the  producer.  Some  may  doubt  this,  but  their  doubts 
will  be  removed  in  a  subsequent  chapter,  where  this 
phase  of  the  question  will  be  more  fully  discussed. 

Probably   some   people  may   resent  this    entire   com- 


154  THE  STRANGLE  HOLD 

parison;  they  think  it  ridiculous  and  absurd,  or  at  least 
untrue.  If  they  are  not  convinced  after  reading  what 
the  Comptroller  of  the  Currency  has  to  say  in  the  next 
chapter  they  would  possibly  change  their  minds  upon 
applying  at  any  bank  for  a  loan. 

Let  us  suppose  a  man  applies  at  his  home  bank  for 
a  loan.  Such  an  application  would  be  a  request  to  be 
allowed  to  use  the  most  important  public  utility.  The 
first  question  he  would  be  called  upon  to  answer  would 
be:  "What  are  you  going  to  do  with  the  'money'."*"  So 
customary  has  a  question  of  this  sort  become  that  it 
seems  now  perfectly  natural.  But  when  one  thinks 
about  it  a  little,  and  sees  what  an  assumption  it  makes  it 
will  be  resented.  For  does  it  not  assume  the  relation- 
ship of  master  and  servant?  Or  at  least  that  of  guard- 
ian and  ward.'' 

Where  the  security  is  not  of  the  best,  so  that  the  loan 
must  be  applied  to  that  security  in  order  to  make  it 
good,  the  question  is  logically  justifiable;  but  where  a 
man  is  offering  ample  security  for  the  use  of  the  medium 
of  exchange,  the  banker  has  no  right  to  inquire  into 
his  business.  Under  such  circumstances  the  question  is 
virtually  an  insult,  for  it  assumes  that  the  banker  is  the 
master  or  at  least  the  guardian  of  the  customer. 

It  is  cheerfully  admitted  that  neither  the  banker's 
question,  nor  his  refusal  to  make  the  loan,  are  prompted 
by  any  feeling  on  his  part  of  that  of  a  master  toward  a 
servant,  but  this  in  effect  makes  no  difference,  for  the 
result  is  the  same. 

Our  analogy  is  also  borne  out  by  the  fact  that  the 
answer  of  a  baron — the  small  banker — when  asked  for 


MODERN  FEUDALISM  155 

a  loan,  will  depend  very  much  upon  how  his  overlord, 
the  reserve  city  banker,  feels  toward  business  conditions 
and  the  future  outlook;  the  latter's  conclusions  are  in 
turn  drawn  from  the  head  of  all  national  financial  power, 
otherwise  known  as  "Wall  Street." 

In  short,  is  there  any  practical  difference  between  a 
system  where  the  master  owns  the  land,  and  permits  his 
serf  to  work  it  under  his  direction,  and  one  in  which  the 
master  controls  the  medium  of  exchange,  which  must  be 
used  by  the  producer  to  carry  on  his  business? 

The  feudal  master  controlled  the  basis  of  all  industry, 
the  land,  while  the  modern  master  controls  the  means  of 
carrying  on  all  industry,  the  medium  of  exchange. 
Is  there  any  difference? 

Perhaps  this  comparison  of  our  modern  financial  sys- 
tem to  the  feudal  system  of  bye-gone  days  is  liable  to 
become  tedious  with  too  long  a  discussion,  so  with  one 
more  picture  we  will  turn  to  further  direct  considera- 
tions. 

An  old  historian  saw  the  evil  effects  of  the  old  system 
of  feudalism,  whereby  one  class  worked  in  order  to  sup- 
port the  other  in  idleness;  and,  in  order  to  show  this 
evil  the  more  clearly,  he  drew  a  picture  to  represent  the 
conditions  of  the  day.  In  this  picture  he  showed  the 
king  standing  on  the  shoulders  of  his  overlords  these 
overlords  stood  on  the  shoulders  of  their  lesser  lords, 
who  in  turn  stood  on  the  shoulders  of  their  own  vassals, 
the  minor  landholder;  finally  these  stood  directly  on  the 
back  of  the  poor  peasant  or  serf,  who  tilled  the  land, 
And  so  in  addition  to  his  work  in  tilling  the  soil  and 
bringing  forth  a  produce  from  it,  the  serf  had  to  bear 


156  THE  STRANGLE  HOLD 

the  burden  of  all  these  successive  lords  and  overlords, 
and  the  sovereign  himself,  upon  his  shoulders.  Nat- 
urally such  a  weight  bore  him  down,  so  that  he  could  not 
even  cultivate  his  fields  properly. 

The  force  of  this  picture  was  to  show  how  the  old 
system,  by  placing  all  the  weight  upon  the  one  class  of 
producers,  tended  to  restrict  the  production  of  this  class 
itself.  Precisely  the  same  thing  applies  to  our  modern 
financial  feudalism.  The  entire  weight  and  restriction  of 
a  bad  financial  system  rests  upon  the  shoulders  of  the 
producers,  and  hinders  them,  so  that  they  are  unable 
to  carry  their  production  even  with  reasonable  closeness 
to  its  fullest  development. 

Since  the  object  of  civilization  is  to  provide  for  the 
wants  of  the  community  with  the  least  effort  on  the  part 
of  the  members  of  the  community,  our  present  system  is 
directly  opposed  to  the  advancement  of  our  civilization. 

It  is  true  that  the  individual  banker  cannot  be  blamed 
for  the  difficulty  the  producer  has  in  obtaining  proper 
credit;  the  fault  is  with  the  entire  banking  system.  But 
this  does  not  lighten  the  gravity  of  the  fault,  nor  remove 
its  bad  effects. 

The  weakness  of  the  system  is  shown  when  two  dif- 
ferent institutions  had  to  be  erected  in  an  attempt  to  take 
care  of  the  farmers'  need  for  credit.  The  Federal  Farm 
Loan  Act  is  but  one  indictment  of  the  inadequate,  ineffi- 
cient, and  antiquated  banking  system  that  hinders  the 
forces  of  agriculture,  industry,  and  commerce  today. 
The  War  Financing  Corporation  and  the  Edge  Act  are 
recent  indictments  to  the  same  effect. 

And  one  of  the  chief  phases  of  this  inadequacy  lies 


MODERN  FEUDALISM  157 

in  the  autocratic  power  of  the  banker  which  has  been 
the  subject  of  discussion  in  the  preceding  pages.  This 
autocratic  power  is  sometimes  exercised  very  ruthlessly. 

For  instance,  the  lords  of  finance  recently  discovered 
that  credit  inflation  had  caused  extravagance.  Even 
working  men  were  spending  their  money  for  automobiles. 
Word  was  sent  out  that  the  credit  situation  demanded 
curtailment.  It  was  not  an  order;  it  was  no  more  than 
a  suggestion,  but  no  king's  command  could  have  been 
more  promptly  obeyed.  Credit  was  withdrawn  from 
the  automobile  dealers.  As  a  result,  sales  contracts  had 
to  be  discounted  through  speculators  at  15,  20,  and  25%. 
Orders  for  machines  were  cancelled.  The  automobile 
business  slumped  and  started  our  present  business  de- 
pression. It  was  blamed  to  over-production,  but  it  was 
not  over-production,  for  the  demand  had  not  been  over- 
satisfied.  It  was  just  the  result  of  the  automobile  deal- 
ers having  been  thrown  out  of  the  bank. 

The  question  is  now  whether  we  shall  erect  a  financial 
asylum  for  them  as  we  did  for  the  farmers,  and  as  is 
being  done  for  the  exporter,  or  whether  the  problem 
shall  be  solved  in  a  logical,  proper,  and  thorough  way, 
through  public  control  of  bank  credit.  This  question 
does  not  concern  financial  outcasts  alone,  for  we  are  all 
losers  by  the  business  depression  and  besides,  no  one 
knows  where  the  axe  will  fall  next. 

No  personal  liberty  can  exist  so  long  as  any  public 
utility  so  vital  as  the  medium  of  exchange  is  allowed  to 
rest  in  private  hands.  The  bad  effects  of  private  con- 
trol of  a  great  public  utility  were  quite  apparent  in  the 
old  days   of  unregulated  railroad   operation,  when  the 


158  THE  STRANGLE  HOLD 

officials  could  show,  and  use,  their  authority  by  refusing 
the  shipper  a  car,  or  by  charging  an  exorbitant  rate,  or 
by  giving  a  competitor  a  rebate,  or  using  any  other 
means  of  unfair  discrimination.  The  power  of  the  auto- 
cratic railroad  official  was  then  easily  seen,  and  when 
the  evils  in  the  private  control  of  that  public  utility 
became  so  obvious,  it  was  soon  done  away  with. 

The  chains  by  which  the  banker  binds  us  are  invisible, 
and  our  rulers  assume  no  apparent  regal  prerogatives; 
we  are,  therefore,  lulled  into  believing  that  we  have  a 
freedom  such  as  no  people  ever  before  enjoyed.  How 
the  real  state  of  affairs  differs  from  this  apparent  state 
is  so  obvious  now  to  the  reader  that  it  needs  no  repeti- 
tion. 

If  these  evils  were  unchangeable,  if  the  private  control 
of  our  medium  of  exchange  could  not  be  done  away  with, 
if  we  were  destined  forever  to  live  and  carry  on  our 
businesses  under  the  autocratic  supervision  of  the  finan- 
cial powers,  it  would  be  of  no  avail  to  point  out  the 
truth.  It  would  be  better  for  us  to  blind  ourselves  to 
the  real  facts  of  the  case,  and  to  live  on  in  our  apparent 
freedom,  suffering  its  evils  patiently.  But  it  can  be 
changed,  and  we  have  seen  how  easily  the  change  can  be 
brought  about. 

The  American  people  will  certainly  not  permit  this 
strangle-hoid  on  liberty  and  on  all  productive  energy  to 
continue  when  they  know  that  thirty  words  properly 
placed  in  the  Federal  Reserve  Act  will  completely  de- 
stroy the  feudal  power  of  the  "Money  Trust." 

It  will  not  be  difficult  for  business  men  to  conceive  of 
the  advantages  that  would  accrue  to  them  from  such  a 


MODERN  FEUDALISM  159 

change.  By  it  they  would  be  enabled  to  carry  on  their 
business  without  being  compelled  to  accept  the  judg- 
ment and  yield  to  the  will  of  the  banker.  Such  a  con- 
dition would  be  so  foreign  to  present  conditions  that  the 
relief  can  hardly  be  imagined.  Indeed,  the  thought  of 
being  able  to  ignore  the  banker  while  using  the  bank's 
credit  is  so  inconceivable  that  it  may  even  cause  the 
reader  to  doubt  whether  the  proposed  change  is  prac- 
ticable. And  yet  it  is,  essentially  practicable,  and  ex- 
ceedingly simple  to  carry  out,  as  a  review  will  show. 

The  proposed  measure  would  in  essence  only  require 
the  banker  to  extend  the  use  of  the  public  utility  in  his 
hands  to  anyone  who  would  have  a  right  to  use  it — 
that  is,  to  anyone  who  could  give  proper  security  for 
a  loan. 

With  such  a  change  accomplished  every  business  man 
could  know  at  all  times  his  limit  of  credit.  He  would 
certainly  appreciate  the  right  of  being  able  to  use  his 
credit  when  and  as  he  pleased  and  to  conduct  his  busi- 
ness according  to  his  own  judgment  without  question  or 
hindrance  from  any  one.  And  this  improvement  in 
business  conditions  would  all  be  accomplished  through 
public  control,  which  is  our  present  method  of  dealing 
with  all  other  public  utilities. 

There  is  no  suggestion  of  a  change  in  the  kind  of 
money,  the  institution  which  issues  it,  or  the  method  of 
using  it. 

For  if  a  banker  today  were  going  to  make  a  loan  on 
personal  property  such  as  wheat,  iron,  hides,  wool,  etc., 
he  would  accept  as  the  value  the  price  established  by  the 
market  where  such  goods  are  sold.     No  change  in  this 


160  THE  STRANGLE  HOLD 

method  is  suggested.  The  only  change  desired  is  that 
all  must  be  treated  alike  by  the  banker.  If  one  thou- 
sand bushels  of  wheat  is  good  security  for  a  loan  of  one 
thousand  dollars  to  Jones,  then  it  should  be  good  security 
for  a  loan  of  the  same  amount  to  Smith;  and  the  way 
the  banker  feels  personally  toward  either  Jones  or  Smith 
should  make  absolutely  no  difference. 

In  the  case  of  a  loan  on  land,  no  change  is  suggested 
except  one  in  the  method  of  appraising  its  value. 

Instead  of  letting  the  banker  or  a  bank  appraiser 
guess  at  the  value  and  charge  a  good  sum  for  the  guess, 
it  is  suggested  that  we  make  the  personal  interest  of 
the  property  owners  of  the  commimity  settle  the  value 
through  the  Assessor's  office  in  a  simple  and  practical 
way  with  little  or  no  expense  to  anyone,  but  with  perfect 
safety  and  satisfaction  to  all. 

These  few  changes  are  simple  and  obvious  but  once 
they  are  made  any  business  man  may  know  at  any  time 
how  much  he  is  entitled  to  borrow  from  the  bank.  He 
would  merely  have  to  find  the  value  set  on  his  property 
through  these  public  agencies;  then  by  applying  to  that 
amount  the  percentage  of  loan  to  value  established  by 
the  state  banking  authority  or  the  Federal  Reserve  Board 
he  would  know  exactly  what  amount  he  could  borrow. 

For  instance  let  us  suppose  a  manufacturer  desired  to 
buy  a  thousand  tons  of  iron.  The  iron,  we  will  say,  is 
quoted  at  $60  a  ton,  and  the  percentage  of  loan  to  value 
established  on  such  a  security  is,  say,  70%.  The  thou- 
sand tons  would  cost  $60,000.  When  put  in  a  warehouse 
the  manufacturer  would  be  entitled  to  borrow  on  the 
warehouse  receipt  70%  of  $60,000  or  $42,000.     Then 


MODERN  FEUDALISM  161 

to  swing  the  deal  he  would  only  require  of  his  own  cash 
$18^000  and  enough  to  pay  the  freight. 

There  would  be  no  guess-work  about  this  deal,  no 
time  wasted,  no  humility,  no  pandering  to  the  banker. 
He  could  figure  it  all  out  in  his  ofEce  and  then  wire  his 
order.  When  the  iron  was  shipped  he  would  deposit 
with  the  bank  his  note  for  $42,000  with  the  bill  of  lading 
attached,  and  with  this  loan,  plus  the  $18,000  he  already 
has,  he  pays  cash  for  the  iron,  and  is  thus  enabled  to 
take  his  discount  or  the  transaction  could  be  handled 
through  an  acceptance. 

Similarly  a  merchant  who  might  want  to  buy  a  thou- 
sand barrels  of  sugar,  or  other  merchandise,  could  do  it 
in  the  same  way,  and  without  any  uncertainty  or  worry 
either  for  himself  or  the  banker. 

Since  the  use  of  the  medium  of  exchange  would  be  a 
right  which  he  could  always  take  advantage  of,  so  long 
as  the  value  of  the  security  given  did  not  fall,  these 
notes  could  be  renewed  indefinitely.  The  only  requisite 
would  be  that  the  margin  of  security  be  maintained  and 
the  interest  paid. 

Such  a  procedure  would  probably  seem  strange  for 
business  men.  They  would  feel  unaccustomed  to  their 
new  freedom,  and  hardly  be  able  to  realize  that  they 
could  go  ahead  without  telling  all  their  business  plans 
to  the  banker  and  then  worrying  whether  he  would  let 
them  have  the  money.  But  the  habit  of  deferring  to 
the  banker  would  be  overcome  in  time,  and  we  would 
gradually  learn  to  get  along  without  a  guardian.  And 
what  a  relief  it  would  be!  Especially  in  the  knowledge 
that  the  banker  would  have  to  renew  the  note  as  long  as 


162  THE  STRANGLE  HOLD 

the  security  were  kept  at  the  required  margin  and  the 
interest  paid  when  due. 

As  to  the  right  or  wrong  of  the  proposed  change,  the 
right  is  entirely  on  the  side  of  public  control.  For  bank 
credit  has  gained  its  position  as  our  medium  of  exchange 
only  through  the  laws  which  the  people  make.  Through 
our  laws  the  banker  is  enabled  to  exercise  a  function 
which  properly  belongs  to  the  government. 

Instead  of  the  proposed  change  taking  any  property 
or  any  rights  from  the  banker  it  is  just  the  reverse. 

The  banker  is  a  trespasser  on  the  peoples'  rights. 
Through  the  development  of  the  banking  habit,  aided  by 
our  banking  laws,  the  banks  have  usurped  the  most  im- 
portant government  function,  that  of  money  control. 

There  is  no  more  reason  for  allowing  the  banker  to 
continue  this  trespass  than  there  would  be  for  permit- 
ting any  body  of  private  citizens  to  move  into  one  of 
our  public  buildings  and  use  it  for  their  own  purposes 
to  the  exclusion  and  detriment  of  the  public. 

There  is  not  the  slightest  justification  for  our  present 
banking  system  nor  any  reason  why  the  banker  should 
continue  to  be  our  lord  and  master,  and  so  there  can  be 
no  possible  objection  to  the  proposed  change  as  a  matter 
of  principle.    Indeed,  the  very  opposite  is  the  case. 

For  since  it  is  through  our  laws  that  bank  credit  has 
become  our  greatest  public  utility,  and  since  its  value  is 
derived  entirely  from  those  laws,  it  is  not  only  our  right, 
but  our  bounden  duty,  to  put  it  under  public  control.  It 
is  public  property.  It  belongs  to  the  people  in  common 
and,  therefore,  it  must  be  at  the  service  of  all  on  the 
same  terms. 


CHAPTER  X 
INTEREST 

There  may  still  remain  some  among  those  who  read 
these  pages  who  doubt  the  validity  of  the  indictment 
contained  in  the  preceding  chapter.  Perhaps  they  feel 
that  nothing  sufficiently  official  or  authentic  has  been 
cited  to  prove  the  case. 

If  this  be  so  then  their  doubts  will  soon  be  dispelled 
in  the  succeeding  few  pages.  Here  they  will  find  indis- 
putable evidence  of  the  feudalistic  power  now  in  the 
hands  of  our  present  day  masters,  the  banking  interests, 
and  of  the  ruthless  and  destructive  way  in  which  the 
power  has  been  and  still  is  exercised.* 

This  evidence  is  to  be  found  in  recent  reports  of  Mr. 
John  Skelton  Williams,  Comptroller  of  the  Currency  of 
the  United  States.  Were  it  not  for  his  official  position 
and  the  sound  facts  which  called  them  forth  some  of  his 
statements  would  soimd  like  the  ravings  of  a  soap-box 
reformer  or  the  scare-headlines  of  a  propagandist  jour- 
nal. Coming  as  they  do,  however,  from  such  an  authori- 
tative and  responsible  source,  they  cannot  but  be  accepted 
as  authentic. 

Among  the  most  recent  of  these  is  a  statement  given 
by  the  Comptroller  to  the  press — a  statement  which,  as 
would  be  expected,  raised  a  howl  of  vigorous  protest.  In 
this  statement  Comptroller  Williams  exposed  the  fact 


*See  Appendix  Page  302. 

163 


164.  THE  STRANGLE  HOLD 

that  the  rates  for  call  money  used  by  New  York  banks 
are  fixed  by  a  committee  of  brokers  on  the  New  York 
stock  exchange.  Among  the  evils  resulting  from  this 
practice  he  pointed  out  the  fact  that  since  the  rate  on 
call  money  affects  prices,  especially  the  prices  of  bonds 
and  stocks,  the  committee  is  thereby  enabled  to  deter- 
mine the  trend  of  prices  and  to  quickly  effect  the  prices 
of  securities.  Having  in  this  way  an  "inside"  knowledge 
of  how  security  prices  are  going  to  move,  or  rather, 
being  thereby  enabled  to  influence  the  movement  of  these 
prices,  this  committee  of  brokers  has  the  opportunity  of 
profiting  largely,  and  without  risk,  by  operations  on  the 
stock  market.* 

Glaring  as  such  a  fault  is,  however,  it  is  only  one  of 
the  lesser  evils  that  result  from  this  improper  concen- 
tration of  power  in  the  hands  of  a  few.  The  Comptroller 
pointed  out  a  still  greater  objection  to  the  practice  in  the 
fact  that,  by  raising  the  rate  on  call  money  in  the  finan- 
cial center,  money  which  otherwise  would  be  used  to 
stimulate  legitimate  business  and  to  foster  production 
in  other  parts  of  the  country  would  be  attracted  to  New 
York  and  used  for  speculative  purposes.  In  this  way 
the  practice  resulted  in  defeating  one  of  the  primary 
purposes  of  the  Federal  Reserve  Act,  namely,  the  orderly 
distribution  of  money  throughout  the  country  to  meet 
the  needs  of  commerce  and  agriculture. 

As  was  to  be  expected,  this  statement  of  the  Comp- 
troller raised  a  vigorous  storm  of  protest  from  the 
bankers.  For  doing  his  duty  in  pointing  out  a  very 
glaring  defect  in  our  financial  system.  Comptroller  Wil- 


♦See  Comptroller's  statement  printed  in  the  Appendix. 


INTEREST  165 

liams  was  severely  taken  to  task  at  the  meeting  of  the 
American  Bankers  Association  which  condemned  his 
plain  statement  of  facts,  as  a  "dangerous  attack  on  the 
credit  structure  of  the  country." 

If  any  comment  is  at  all  necessary  here,  it  will  be 
sufficient  to  remark  that,  to  an  impartial  observer,  such 
a  condemnation  indicates  a  very  tottering  condition  of 
the  country's  credit  structure.  If  our  banking  system  is 
so  shaky  that  a  plain  statement  of  what  any  one  will 
readily  recognize  as  a  very  harmful  and  eminently  unjust 
practice,  can  be  called  "a  dangerous  attack  on  our  credit 
structure"  it  is  about  time  to  put  that  "credit  structure" 
upon  a  more  solid  basis. 

The  solicitation  of  those  bankers  for  the  safety  of 
our  credit  structure  may  have  been  influenced  somewhat 
more  by  personal  interest  than  by  patriotic  motives.  It 
has  been  a  rather  common  practice  for  the  masters  of 
all  ages  to  appeal  to  fear  of  national  calamity  or  to  hide 
personal  interest  behind  patriotic  motives  in  order  to 
save  their  privileges. 

Indeed,  if  the  foregoing  statements  have  such  dan- 
gerous possibilities,  what  must  have  been  the  danger  of 
other  statements  made  by  the  same  Comptroller,  at  an 
earlier  date.  For  not  so  very  long  ago  the  Comptroller 
had  occasion  to  call  a  number  of  banks  to  order  for  prac- 
ticing usury.  The  idea  of  usury  is  generally  connected 
with  the  Middle  Ages,  when  the  exaction  of  any  interest 
at  all  on  loans  was  unlawful;  and  where  the  money- 
lenders, running  as  they  did  the  risk  of  extreme  punish- 
ment, charged  excessive  rates  to  make  up  for  the  danger. 

In  the  minds  of  most  people,  then,  the  practice  of 


166  THE  STRANGLE  HOLD 

usury  is  thought  of  as  being  one  of  the  abuses  of  the 
Dark  Ages,  together  with  such  things  as  the  Spanish 
Inquisition,  The  Star  Chaniber,  and  so  forth.  The  facts, 
however,  are  far  from  this.  For  not  merely  a  few  banks, 
but  more  than  one-third  of  all  the  national  banks  in  the 
United  States  were  convicted  on  their  own  sworn  state- 
ments of  charging  usurious  rates  of  interest,  running,  in 
some  instances,  as  high  as  two  hundred  per  cent  a  month, 
or  more  than  two  thousand  four  hundred  per  cent  per 
annum. 

Certain  parts  of  the  reports  of  the  Comptroller  of  the 
Currency  are  so  interesting  that  they  are  well  worth 
being  reproduced  here. 

In  regard  to  the  City  of  New  York,  the  financial 
center  of  the  country,  the  Comptroller  of  the  Currency 
said: 

"It  is  the  walled  city  from  which  the  barons  have 
levied  tribute  on  a  territory  and  population  vaster 
than  any  king  of  the  Middle  Ages  dreamed  of,  yet 
sometimes  using  methods  as  ruthless  and  savage  as 
those  of  the  robber  nobles  .  .  .  forays  and  levies 
devasting  by  scientific,  artful  methods ;  pillaging  under 
form  of  law,  smiting  with  swords  that  bite  deep, 
though  we  can  not  see  them,  consuming  with  fire  which 
comes  invisible  and  unsuspected." 
Does  anybody  need  a  stronger  confirmation  than  this 
of  our  indictment  of  the  present  financial  system  as 
being  a  stronghold  of  feudal  power  and  practice? 

To  proceed  with  the  Comptroller's  statement,  he  claims 
that  "there  is  no  natural  limit  to  greed  and  the  ambition 
to  acquire,"  offering  as  proof  thereof  the  following: 


INTEREST  167 

"Sworn  reports,  made  by  the  banks  themselves, 
show  that  on  September  2,  1915,  2,743  national  banks, 
out  of  a  total  of  7,613,  were  guilty  of  usury.  This 
at  a  time  when  the  Federal  Reserve  banks  were  offer- 
ing money  freely  to  national  banks  in  every  part  of 
the  country  at  rates  varying  from  three  and  a  half 
to  five  per  cent. 

"Such  a  policy  is  bad  and  dangerous,  even  in  the 
business  centers  where  borrowers  are  men  of  experi- 
ence and  skilled  in  business,  but  the  real  brutality  and 
horror   of   it  develops   in   the  rural   districts.      Some 
reports  from  the  South  and  West,  the  Northwest  and 
the    Southwest,    are   blood-curdling.      They    are   like 
stories  from  darkest  Russia;  like  the  ghastly  wrongs 
done  the  French  country  people  by  the  old  nobility. 
The  small  farmer  or  planter  is  usually  poor  and  with- 
out money  to   employ  lav/yers  or  the  instruction  to 
understand  his  own  rights.     Because  of  this  helpless- 
ness, he  falls  an  easy  victim  to  the  rapacity  of  the 
unscrupulous  money  lender,  and  goes  to  a  destruction 
that  his  energy  and  honesty  do  not  deserve." 
Nor  is  this  merely  an  empty  indictment,  nnsupported 
by    direct    proof.      In    support   of    his    statements    the 
Comptroller   gives   a   few  typical   examples   which   are 
interesting  if  for  no  other  purpose  than  to  prove  that 
greed  has  no  natural  limits.     For  instance  he  says: 

"I  have  the  record  of  the  loans  made  by  one  Texas 
national  bank  to  a  hard-working  woman  who  owned  a 
little  farm  a  few  miles  from  town.  She  borrowed,  in 
the  aggregate,  $2,375,  making  about  thirty  loans  dur- 
ing the  year.     Listen  to  the  details  of  the  robbery: 


168  THE  STRANGLE  HOLD 

$162,50  for  SO  days  at  36  per  cent:  $377  for  S4  days 
at  44  per  cent;  $620.25  for  23  days  at  77  per  cent; 
$11  for  30  days  at  120  per  cent;  $21.50  for  SO  days 
at  90  per  cent;  $33  for  2  days  at  93  per  cent;  $27  for 
15  days  at  195  per  cent;  $110  for  SO  days  at  120 
per  cent — that  was  to  buy  a  horse  for  her  plowing — 
$20  for  48  days  at  187  per  cent;  $6  for  10  days  at 
720  per  cent;  $7  for  3  days  at  2,000  per  cent;  and  so 
on;  every  cent  paid  off  by  what  sweat  and  struggle 
only  God  knows." 

As  an  exceptional  instance,  this  statement  might  not 
be  of  such  overwhelming  concern,  since  the  loans  were 
small.  But  it  is  not  an  exceptional  instance.  In  that 
state  alone  192  banks  out  of  534  were  found  guilty  of 
usury,  charging  all  the  way  from  twelve  to  two  hundred 
and  fifty  per  cent  on  the  money  they  could  get  from  the 
Federal  Reserve  Bank  for  from  three  and  a  half  to  five 
per  cent. 

Another  instance  cited  by  the  Comptroller  is  equally 
interesting : 

In  Oklahoma,  where  the  legal  rate  of  interest  is 
six  per  cent,  with  ten  per  cent  as  the  maximum  under 
special  contract,  harassed  farmers  paid  all  the  way 
from  12  to  2400  per  cent  with  40  per  cent  as  the 
average.  In  the  case  of  one  bank,  ]\Ir.  Williams 
proved  that  not  a  single  solitary  loan  had  been  made 
under  fifteen  per  cent.  He  cited  one  particular  case 
that  he  asked  to  be  regarded  as  typical.  In  the 
spring  the  farmer  went  to  the  bank  and  arranged  for 
a  loan  of  $200.  Out  of  his  necessity  he  was  compelled 
to  pay  55  per  cent  interest  charge.     Unable  to  meet 


INTEREST  169 

the  note  at  maturity,  he  had  to  agree  to  100  per  cent 
interest  in  order  to  get  the  renewal.  The  next  renewal 
forced  him  up  to  125  per  cent.  For  four  years  the 
thing  went  on,  and  all  the  drudgery  of  the  father  and 
the  mother  and  the  six  children  could  never  keep  down 
the  terrible  interest  or  wipe  out  the  principal.  As  a 
finish,  the  bank  swooped  down  and  sold  him  out;  the 
wretched  man,  barefoot  and  hungry,  went  to  work 
clearing  a  swamp,  caught  pneumonia  and  died;  the 
county  buried  him,  and  neighbors  raised  a  purse  to 
send  the  widow  and  children  back  to  friends  in  Arkan- 
sas. 

That  such  a  condition  of  affairs  should  exist  in  this 
twentieth  century  of  enlightenment  would  not  be  believed, 
were  it  not  for  the  authenticity  of  the  source  from  which 
the  information  comes.  But  what  is  still  more  surpris- 
ing is  the  fact  that  this  charging  of  usurious  interest 
rates  does  not  comprise  the  sum  total  of  the  abuses.  For 
while  the  Comptroller  has  stopped  the  particular  abuse 
we  have  discussed  so  far  as  lay  in  his  power  to  do  so, 
and  while  no  national  bank  has  since  dared  to  report  a 
usurious  interest  charge,  the  abuse  has  not  been  done 
away  with  entirely.  For  the  banks  have  several  other 
ways  of  "beating  the  game"  and  achieving  the  same 
abusive  results,  regardless  of  Comptrollers  or  of  state 
authorities. 

One  of  these,  for  instance,  is  where  the  banker  directs 
an  unsuccessful  borrower  to  a  broker.  For  instance, 
when  a  borrower  appears,  the  banker  either  demands  a 
bonus,  or  gives  some  reason  why  he  cannot  handle  the 
loan.     Pretending,  however,  to  be  desirous  of  helping 


170  THE  STRANGLE  HOLD 

the  customer,  and  hiding  his  deceit  under  the  mask  of 
friendship,  he  refers  the  would-be  borrower  to  a  broker 
who,  he  says,  may  be  able  to  secure  the  loan  from  out- 
side parties.  Of  course,  there  will  be  a  little  brokerage 
fee  of  from  two  to  five  per  cent,  and  the  money-lenders 
want  a  little  higher  rate  of  interest  than  the  banks. 

Flattered  by  the  banker's  interest  in  his  welfare,  the 
helpless  borrower  takes  a  card  to  the  broker.  The  latter, 
really  a  stool  pigeon,  goes  into  the  back  door  of  the 
bank  and  secures  the  funds  with  which  to  make  the  loan. 

The  advantages  of  this  method  are  apparent.  The 
bank  escapes  the  odium  of  usury.  The  official  who  turns 
the  trick  does  not  have  to  divide  his  rake-oflF  with  the 
stockholders  of  the  bank  in  which  he  is  employed.  And 
the  borrower's  resentment  is  turned  against  the  stool 
pigeon  instead  of  the  banker.  High  class  bankers  no 
longer  consider  this  method  "ethical,"  and  they  do  not 
practice  it.  This  makes  little,  if  any  difi^^erence,  however, 
for  they  have  an  "ethical"  method  of  putting  on  the 
screws.  This  is  by  requiring  the  borrower  to  keep  his 
balance  at  a  certain  figure. 

If  the  borrower  gets  a  loan  of  ten  thousand  dollars 
it  is  with  the  understanding  that  he  is  to  maintain  a 
balance  in  the  bank  of  from  two  to  four  thousand  dol- 
lars. That  is,  the  borrower  is  required  to  keep  from 
one-fifth  to  one-third  of  the  amount  he  borrows  always 
on  deposit  in  the  bank;  so  if  he  really  needs  seven  thou- 
sand dollars  he  must  borrow  and  pay  interest  on  at 
least  ten  thousand  which,  of  course,  raises  the  rate  on 
the  money  actually  used  and  what  appears  to  bs  six  per 
cent  money  is  really  nine  or  ten  per  cent  money. 


INTEREST  171 

This  practice  is  considered  perfectly  "ethical,"  and 
it  is  so  common  that  bankers  have  evolved  a  rule  by 
which  they  figure  how  much  a  man  is  entitled  to  borrow. 
The  basis  of  the  problem  is  the  average  monthly  or 
yearly  balance  the  borrower  has  carried  in  the  bank 
and  the  answer  is  about  four  or  five  times  that  balance. 

Thus  a  business  man  who  has  carried  a  bank  balance 
of  $2,500,  paying  interest  out  of  his  own  pocket  on  any 
loan,  while  his  balance  lies  there  idle,  not  drawing  a 
cent  of  interest  or  at  best  a  low  rate  of  interest,  would 
be  figured  as  good  for  a  loan  of  about  $10,000.  If  his 
balance  were  $5,000,  then  he  might  get  a  loan,  on  the 
basis  of  this  larger  balance,  of  $20,000  or  perhaps  more. 

These  are  a  few  of  the  methods  by  which  our  modern 
feudalistic  masters  grind  out  their  wealth  from  the  toil 
of  their  serfs.  Can  anyone  still  doubt  the  claim  that  we 
are  living  under  a  modern  autocratic  regime  that  is 
rather  more  than  less  dominant,  ruthless,  and  terrible 
than  that  of  former  ages.'' 

When  we  read  of  the  grinding  taxes  imposed  upon  the 
common  people  by  the  autocratic  government  of  the 
Bourbon  Kings  of  France,  we  wonder  more  at  their 
long  patience  than  at  the  result  of  their  final  despera- 
tion, which  ended  in  the  Reign  of  Terror.  The  people 
of  those  days  were  no  different  from  what  they  are  now. 
There  were  good  and  innocent  Frenchmen  among  the 
aristocracy  who  protested  against  existing  injustices,  and 
there  were  high-spirited,  intelligent  and  liberty  loving 
people  among  the  down-trodden  commoners;  but  a  cour- 
ageous and  intelligent  peasant  remained  helpless  against 
tyranny,  because  his  neighbors  lacked  the  force  to  assert 


172  THE  STRANGLE  HOLD 

their  rights  and  the  courage  to  organize.  The  peasants 
who  would  have  started  an  uprising  were  bound  by  the 
inertia  of  the  others.  Constant  pressure  of  wrong  finally 
overcame  this  inertia  and  the  righteous  wrath  of  the 
people  was  finally  kindled  into  an  all-consuming  flame 
which  spared  neither  innocent  nor  guilty  among  the 
governing  class. 

If  this  bit  of  history  teaches  anything,  it  is  that  the 
crime  of  one  of  a  class,  or  an  injustice  to  one  of  a  class, 
in  the  exercise  of  a  public  function,  is  the  crime  of  all 
that  class,  and  an  injustice  to  all  of  the  other  class. 

And  from  the  statements  it  will  be  seen  that  even  if 
we  are  not  personally  and  directly  affected  by  the  abusive 
practices  current  under  our  present  financial  system,  we 
are,  nevertheless  vitally  concerned.  Whether  or  not  we 
are,  individually,  affected  by  a  particular  act  at  a  par- 
ticular time,  we  are  at  any  rate  greatly  concerned  in  an 
indirect  way.  For  if  the  weeds  of  greed,  injustice,  and 
oppression  are  permitted  to  grow  at  all,  their  seeds  will 
soon  produce  more  and  more  weeds,  and  the  whole  garden 
will  soon  be  ruined. 

The  few  illustrations  given  by  the  Comptroller  serve 
to  show  that  autocratic  power  in  modern  America  has 
the  same  tendency  toward  cruelty,  injustice  and  disre- 
gard of  the  rights  of  others  that  it  had  in  France  prior 
to  the  French  Revolution. 

And  this  is  not  all.  For  it  is  not  the  flagrancy  of 
the  cases  cited,  nor  the  question  of  whether  few  or  many 
suffer,  that  is  of  greatest  importance.  Essentially  it  is 
a  matter  of  principle.  The  greatest  evil  lies  in  the  fact 
that  the  system  allows  of  such  abuses.     And  this  is  not 


INTEREST  17* 

modified  by  the  fact  that  the  particular  abuse  has,  to  a 
great  extent,  been  allayed.  For  its  correction  was  an 
accident.  It  happened  as  a  result  of  the  appointment 
of  an  efficient,  and  fearless  Comptroller  of  the  Currency. 

In  fact,  the  matter  of  interest,  and  all  the  abuses 
which  we  have  seen  are  possible,  and  have  existed,  under 
the  present  system  of  banking  are  really  only  of  minor 
concern  to  us.  For  evil  as  are  their  effects,  they  arise 
from  a  condition  which  is  in  itself  merely  the  effect  of  a 
still  more  vital  evil,  the  fault  that  lies  at  the  heart  of  our 
financial  structure. 

This  is,  once  more,  the  private  control  of  the  greatest 
of  all  public  utilities,  the  medium  of  exchange.  This 
private  control  is  the  root  in  which  all  evils,  such  as 
we  have  been  discussing,  and  others  too  countless  to 
enumerate,  find  their  origin.  And  these  and  other  abuses 
will  be  continued,  and  will  forever  crop  out  in  new  and 
terrible  forms,  regardless  of  all  governmental  restraint, 
however  well-intentioned,  that  is  aimed  at  the  effect  and 
not  at  the  cause. 

These  and  many  other  abuses  can  be  prevented  only 
by  removing  their  cause.  The  whole  matter  of  interest 
or  discount,  excessively  injurious  as  it  may  be,  is  but 
a  matter  of  minor  importance.  The  real  concern  is  the 
matter  of  private  control,  from  which  all  the  other  evils 
spring. 

And  once  more  it  can  only  be  said  that  the  marvel  is 
not  that  the  evils  are  so  great,  nor  that  their  effects  are 
so  far  reaching,  as  it  is  that  they  are  allowed  to  exist  at 
all.  It  is  so  apparent  that  our  medium  of  exchange  is 
merely  a  system  of  keeping  track  of  credits  and  that  the 


174  THE  STRANGLE  HOLD 

whole  system  rests  on  the  people's  laws  and  is,  therefore, 
the  peojale's  property  that  our  present  system  seems  a 
slur  on  American  genius  and  business  ability.  It  is  also 
so  plain  that  it  is  our  greatest  public  utility,  that  it  seems 
incredible  to  see  the  American  people  submitting  to 
tyranny  and  abuse  due  to  its  private  control.  Especially 
is  this  so  when  the  remedy  for  all  these  evils  is  such  a 
simple  one.  Thirty  words  to  be  added  to  the  Federal 
Reserve  Act,  would  do  away  with  the  rottenness  at  the 
core  of  our  present  commercial  and  industrial  structure, 
and  thereby  kill  oiF  all  the  weeds  and  cankerous  growths 
that  find  their  origin  in  that  festering  center  of  unre- 
strained private  control. 


THE  GOLD  STANDARD 
CHAPTER  XI 

When  we  read  of  the  misguided  individuals  who,  in 
past  ages,  believed  in  witchcraft  and  sorcery,  who  wor- 
shipped idols,  and  who  fanatically  killed  each  other  in 
the  name  of  religion,  we  are  inclined  to  pity  them.  We 
look  down  upon  these  former  ages  from  our  heights  of 
enlightened  opinions  and  our  great  scientific  and  mate- 
rial progress,  and  congratulate  ourselves  that  we  have 
become  emancipated  from  ancient  and  ridiculous  beliefs. 

And  yet  at  the  same  time  we  have  in  one  metal  an 
idol  which  we  worship  with  no  less  intensity  than  did 
the  people  of  past  ages  worshijD  their  graven  images. 
An  idol,  furthermore,  which  is  raised  on  grounds  no  les3 
fallacious  than  the  idols  of  old;  but  one,  the  worship  of 
which  is  far  more  destructive  in  its  effects  upon  the  real 
progress  of  the  world  than  were  all  the  heathen  creeds 
and  practices  of  all  past  ages. 

This  idol  is  gold,  and  the  pedestal  on  which  it  is 
raised  is  the  fallacy  of  the  gold  standard.  It  rests  upon 
the  idea  that  there  is  an  essential  difference  between 
gold  and  all  other  things,  a  difference  which  gives  this 
one  thing,  gold,  certain  peculiar  properties  by  which  it 
has  certain  power  over  all  other  things. 

The  subject  of  the  gold  standard  is  mentioned  here 
with  the  intention  of  divorcing  the  human  mind  from 
these  ideas.     In  the  suggested  remedy^  no  mention  has 

175 


176  THE  STRANGLE  HOLD 

been  made  of  the  gold  standard  or  of  anjrthing  connected 
with  it  and  none  is  necessary.  For,  as  the  remedy  rests 
upon  the  foundation  of  truth  all  means  used  to  deceive 
and,  all  false  standards  will  automatically  disappear. 

The  United  States,  as  well  as  all  other  progressive 
countries,  has  adopted  the  gold  standard.  Our  finances 
are  said  to  be  on  a  gold  basis,  meaning  that  our  currency 
is  based  on  gold  as  the  money  of  ultimate  redemption. 
Now  to  a  certain  very  limited  extent  this  statement  may, 
guardedly,  be  taken  as  true.  Unless,  however,  it  is  taken 
in  this  very  limited  sense,  it  includes  such  a  multitude  of 
untruths  that  it  becomes  the  foundation  of  a  very  great 
fallacy. 

For  it  leads  to  the  belief  that  gold  is  somehow  above 
all  other  commodities,  and  by  its  very  nature  in  a  posi- 
tion superior  to  them.  Whereas  in  truth  gold  is  a  com- 
modity, just  as  lead  and  iron  are,  having  certain  peculiar 
characteristics  of  its  own,  as  every  other  commodity  has; 
but  differing  in  essential  principle  not  a  whit  from  any 
other  commodity.  For  it  obeys  the  same  natural  laws, 
from  the  law  of  gravity  to  the  laws  of  value  and  price. 
Without  entering  here  into  a  discussion  of  the  various 
theories  of  value  and  price,  it  will  be  sufficient  to  explain 
this  statement  as  meaning  that  gold,  just  as  every  other 
commodity,  has  a  real,  or  true,  value,  which  varies 
according  to  certain  natural  phenomena,  including  de- 
mand and  supply.  Just  as,  roughly  speaking,  demand 
and  supply  determine  the  real  value  of  any  other  com- 
modity, so  they  determine  the  real  value  of  gold. 

The  truth  of  this  is  somewhat  obscured  by  reason  of 
the  fact  that  gold,  having  been  used  as  money  for  many 


THE  GOLD  STANDARD  177 

centuries,  has  had  its  price  fixed  by  law.  That  is,  the 
weight  and  fineness,  or  the  amount  of  pure  metal,  to  be 
put  into  various  gold  coins,  has  been  fixed  and  these 
coins  have  been  designated  as  of  a  certain  value.  The 
significance  of  this  fixed  price  is,  therefore,  that  it  prac- 
tically assumes  that  gold  is  the  standard  of  value. 

It  is  a  standard  in  so  far  as  the  prices  of  other  com- 
modities are  quoted  in  or  referred  to  its  price,  but  as  its 
price  is  not  stable  it  is  not  a  real  standard.  History 
testifies  that  it  has  been  necessary  to  readjust  the  fixed 
price  of  gold  many  times  within  the  past  six  hundred 
years.  If  gold  were  in  itself  the  standard  of  value, 
these  changes  in  its  price  could  hardly  have  happened. 

Furthermore,  the  use  of  gold  for  other  purposes  than 
its  employment  as  a  money  metal — that  is,  the  use  of 
gold  in  the  arts  shows,  in  its  effects  upon  the  gold  coin 
in  circulation.  The  real  value  of  gold  varies  according 
to  the  demand  for  and  supply  of  it.  The  price  of  gold 
as  fixed  by  law  in  the  United  States  today  stands  at 
$20.67  per  ounce.  If  the  production  of  gold  should  fall 
off  very  greatly,  so  that  the  needs  of  goldsmiths,  jewel- 
ers, and  dentists  could  not  be  adequately  supplied,  these 
people  would  be  willing  to  pay  more  for  it.  That  is, 
its  market  or  bullion  price  would  rise.  Suppose  it  rose 
above  the  money  price,  say  to  $22  an  ounce.  Then  gold 
as  bullion  would  be  more  valuable  than  gold  as  coin,  and. 
coins  would  be  melted  up  and  disappear  from  circula- 
tion. 

Again,  gold  always  seeks  the  country  where  the  de- 
mand is  greatest,  where  people  are  willing  to  pay  the 
highest  price,  that  is,  give  up   the  most  goods,   for  it. 


178  THE  STRANGLE  HOLD 

All  these  facts  go  to  show  that  the  real  value,  and, 
therefore,  the  true  price,  of  gold  fluctuates  according  to 
the  supply  of  and  demand  for  it,  just  as  does  the  price 
of  every  other  commodity.  Consequently  the  effect  of 
fixing  the  price  of  gold  at  one  dollar  for  25.8  grains  of 
gold  nine-tenths  fine,  at  the  mint,  is  no  different  in 
principle  from  the  effect  of  fixing  the  price  of  wheat  at 
two  dollars  a  bushel  in  Chicago,  or  the  price  of  iron  at 
four  cents  a  pound  in  Pittsburg. 

It  is  the  fallacy,  however,  that  there  is  a  difference 
between  gold  and  other  commodities,  a  fallacy  which  has 
endured  throughout  the  ages,  and  that  has  been  the  cause 
of  countless  unfortunate  misunderstandings.  And  these 
misunderstandings  will  continue  to  exist  until  the  fallacy 
has  finally  been  done  away  with. 

The  origin  of  this  fallacy  is  not  hard  to  find.  It 
arose  because  of  the  peculiar  fitness  of  gold  to  be  used 
as  a  medium  of  exchange  at  a  time  when  commerce  was 
still  small  enough  not  to  be  restricted  by  its  use.  For, 
as  will  be  remembered,  to  render  efficient  service  a 
medium  must  have  universal  acceptability  and  proper 
elasticity.  Gold  has  universal  acceptability,  and  conse- 
quently, so  long  as  commerce  did  not  grow  to  such  pro- 
portions that  the  lack  of  elasticity  of  the  gold  supply 
hindered  its  development,  gold  formed  a  fairly  good 
medium  of  exchange.  As  a  result  of  this  acceptability 
and  because  its  value  fluctuated  the  least  of  all  com- 
modities, gold  came  into  universal  use  as  a  medium,  by 
which  value  is  measured  and  goods  are  exchanged.  It 
was  but  a  short  step — ^however  fallacious,  to  attribute  to 
gold    the    attributes    of    money    (as    distinct    from    the 


THE  GOLD  STANDARD  179 

medium  of  exchange)  ;  that  is,  to  regard  gold  itself  as 
the  standard  of  value. 

And  bound  up  with  this  fallacy,  in  that  it  depends 
for  its  existence  upon  the  gold  standard,  is  still  another 
fallacy,  namely,  the  assertion  that  gold  is  the  money  of 
ultimate  redemption.  This  fallacy,  as  we  have  seen, 
arose  through  the  development  of  credit  as  a  super- 
structure on  a  medium  of  exchange  composed  largely 
of  gold,  the  purpose  being  to  supply  the  lack  of  elas- 
ticity from  which  gold  suffers. 

Now  it  is  true  that  a  balance  of  trade  is  sometimes 
settled  in  gold.  For  instance,  if  the  United  States  sends 
to  England  meat,  raw  cotton,  and  wheat  greater  in  value 
than  the  fabric  and  textiles  England  sends  to  us,  then 
the  difference  may  be  settled  in  gold,  since  this  is  a 
universally  accepted  medium. 

But  the  statement  that  gold  is  the  money  of  ultimate 
redemption  is  a  different  proposition.  It  means  that  all 
the  currency  of  the  United  States,  including  gold  and 
silver  certificates,  silver  and  fractional  coins,  may  be 
exchanged  for  gold  at  the  United  States  Treasury  at 
the  option  of  the  holder.  It  means,  too,  that  bank  de- 
posits and  other  debts  are  payable  in  gold. 

Now,  as  already  stated,  this  is  true  in  a  limited  sense 
only,  that  is,  so  long  as  too  many  persons  do  not  try  to 
avail  themselves  of  the  promised  exchange  at  the  same 
time.  For  if  the  people  should  attempt  to  make  the 
exchange  in  any  great  quantity  as  they  have  several 
times  in  the  past  the  promise  would  be  found  to  be 
entirely  a  fiction.  Since  the  days  when  gold  was  really 
used  as  a  medium  of  exchange,  instead  of  a  phantom  to 


180  THE  STRANGLE  HOLD 

bolster  credit  as  it  is  now  used,  the  volume  of  trade  or 
business  has  increased  many  fold,  while  the  increase  in 
the  amount  of  metal  has  been  entirely  inadequate.  And 
now  with  the  amount  of  gold  practically  a  fixed  quantity, 
while  the  volume  of  credit  is  piling  up  every  day,  the 
percentage  of  ultimate  payment  money  to  bills  payable 
will  soon  reach  the  vanishing  point. 

The  history  of  finance  is  largely  a  list  of  the  various 
deceits  and  devices  that  have  been  used  to  cover  the  fact' 
that  the  promise  to  pay  in  gold  could  not  be  fulfilled. 
Its  path  is  strewn  with  the  wreckage  of  government 
paper  money  issues,  asset  currencies,  greenbackism, 
bimetalism,  and  a  varied  assortment  of  banking  systems 
and  legislation  induced  by  bank  failures  and  panics. 
Altogether  it  is  a  sorry  story,  filled  with  miseries  and 
repeated  failures,  all  due  to  a  lack  of  understanding  of 
basic  principles  and  of  the  first  requisites  of  a  medium 
of  exchange. 

But  regardless  of  the  amount  of  trouble  that  this 
fiction  of  ultimate  gold  redemption  has  caused,  it  is  really 
only  a  minor  point.  It  is  one  of  the  excrescences  of  the 
real  evil  at  the  bottom  of  all  evil  which  is  the  private 
control  of  our  medium  of  exchange.  As  has  been  shown, 
the  gold  standard  merely  intensifies  this  evil.  Since  the 
promise  to  redeem  in  gold  cannot  be  fulfilled,  it  need  not 
be  considered,  in  arriving  at  an  intelligent  solution  of 
the  financial  tangle.  It  is  necessary,  however,  that  the 
solution  shall  so  completely  eradicate  the  basic  evil  that 
the  resulting  fallacies  will  alfo  disappear.  As  has  re- 
peatedly been  shown,  the  suggested  remedy  thoroughly 
fulfills  this  requirement. 


THE  GOLD  STANDARD  181 

But  the  fallacy  of  the  gold  standard  is  of  exceedingly 
great  interest  in  illustrating  the  hold  fiction  such  as  this 
can  gain  on  the  minds  of  the  greatest  authorities,  and  as 
an  example  of  how  such  a  false  promise  confuses  what  is 
really  simple  and  clear.  It  furnishes  an  explanation  as 
to  why  our  present  financial  system  seems  so  intricate 
and  unintelligible  and  the  depth  of  the  deception  is  re- 
alized when  one  sees  this  fallacy  treated  as  the  truth  by 
eminent  authorities  on  money  and  banking. 

An  example  will  bring  this  point  home  so  clearly  that 
an  examination  of  it  is  highly  interesting  as  well  as 
instructive.  This  is  furnished  by  an  address  made  be- 
fore the  Ohio  Bankers'  Association  in  1905,  by  Leslie  M. 
Shaw,  Secretary  of  the  Treasury  from  1902  to  1907. 

In  this  address  Secretary  Shaw  is  reported  to  have 
said: 

"The  fact,  and  I  think  it  is  a  fact,  that  the  United 
States  has  the  best  currency  in  the  world  does  not 
imply  that  the  currency  system  of  the  United  States 
is  perfect,  or  that  it  cannot  be  improved.  It  is  as 
safe  as  any  system  in  the  world  because  it  is  estab- 
lished on  the  only  safe  basis  known  to  man — the  gold 
standard." 

The  double  standard  of  gold  and  silver  at  the  ratio 
of  sixteen  to  one  was  in  force  until  1873,  when  the 
country  adopted  the  gold  standard.  But  panics  con- 
tinued to  occur  every  ten  years  as  before,  which  would 
argue  that  the  gold  standard  is  hardly  the  great  tower 
of  strength  and  safety  it  is  here  claimed  to  be.  Mr. 
Shaw  continued: 

"The  United  States  dollar  is  worth  not  only  one 


182  THE  STRANGLE  HOLD 

hundred  cents,  but  one  hundred  gold  cents.  The  dol- 
lar is  worth  25.8  grains  in  gold.  That  measures  the 
market  vahie  of  our  dollar.  Whatever  25.8  grains  of 
gold  will  buy  our  dollar  will  buy,  and  it  is  worth 
precisely  the  same  uncoined  as  coined,  for  the  Govern- 
ment stands  ready  to  coin  it  free  and  in  unlimited 
quantities." 

All  these  statements  are  apparently  true,  but  funda- 
mentally misleading,  because  a  dollar  is  worth  one  hun- 
dred cents  worth  of  any  commodity  and  gold  is  only  a 
commodity  not  one  whit  different  from  any  other.  To 
be  sure  the  price  of  gold  has  been  fixed  by  law  for 
many  generations,  which  may  add  to  its  dignity;  but 
during  the  Food  Administration  we  saw  many  other  com- 
modities, such  as  wheat,  have  the  same  dignity  bestowed 
upon  them. 

In  less  than  two  years  after  Mr.  Shaw  made  this 
claim  of  the  solidity  of  our  financial  system  because  of 
the  gold  standard,  the  country  was  using  clearing  house 
certificates  under  pressure  of  continued  holidays  declared 
by  the  governors  of  the  several  states.  What  difference 
is  it  whether  25.8  grains  of  gold  is  worth  a  dollar,  or  a 
bushel  of  corn  is  worth  a  dollar?  It  is  a  distinction 
without  a  difference. 

But  Mr.  Shaw  did  not  stop  here.     He  went  further: 

"Then  in  addition,  every  dollar  of  our  currency, 
gold  certificates,  silver,  silver  certificates.  United 
States  notes.  Treasury  notes.  National  Bank  notes, 
subsidiary  silver,  nickel,  and  copper  coins,  is  redeem- 
able in  or  exchangeable  for  gold  at  the  will  of  the 
holder." 


THE  GOLD  STANDARD  183 

This  statement  is  true  only  when  the  aggregate  holders 
of  these  various  other  kinds  of  money  do  not  wish  to 
exchange  them  for  gold.  It  is  not  true  when  an  occasion 
arises  in  which  they  would  wish  to  make  the  exchange, 
but  even  if  the  statement  were  true  Mr.  Shaw  completely 
ignored  bank  credit,  which  constitutes  more  than  95% 
of  our  medium  of  exchange,  while  everything  he  men- 
tioned constitutes  less  than  5%. 
Continuing  Mr.  Shaw  said: 

"This  fixes  the  stability  of  our  currency.     Its  value 
does  not  and  can  not  fluctuate." 

If  by  the  use  here  of  the  word  "currency"  the  secretary 
intended  to  confine  his  statement  of  gold  redemption  to 
the  "government  issued"  money  alone  the  statement 
might  be  true.  The  government  possibly  could  redeem 
enough  "currency"  used  in  this  narrow  sense  to  hold  it 
at  par,  but  since  government  issued  money,  including 
gold,  constitutes  less  than  5%  of  our  MEDIUM  OF 
EXCHANGE,  the  statement,  even  if  true,  is  to  say  the 
least  entirely  misleading. 

Continuing  Mr.  Shaw  then  admitted: 

"The  system  is  not  perfect,  largely  because  it  is 
non-elastic.  It  fails  to  respond  in  volume  to  the 
changing  needs  of  the  seasons  and  localities.  Atten- 
tion has  been  called  to  the  non-elastic  character  of 
our  currency  many  times  and  by  many  people,  but 
that  there  will  be  no  further  currency  legislation  until 
we  shall  have  experienced  a  panic  occasioned  by  this 
want  of  elasticity,  I  am  fully  convinced." 
This  prophesy  that  Congress  would  do  nothing  to 
improve  a  very  defective  financial  system,  although  pub- 


184  THE  STRANGLE  HOLD 

lie  attention  had  often  been  called  to  its  defects,  proved 
true  within  two  years  after  it  was  made,  when  the  panic 
of  1907  caught  the  country  unprepared.  In  fact,  no 
remedial  action  of  importance  was  taken  until  six  years 
after  the  panic  of  1907,  when  the  Federal  Reserve  Act 
was  evolved. 

As  JNIr.  Shaw  also  prophetically  said: 

"The  country  does  not  appreciate  the  danger,  and 

until  the  danger  is  fully  understood  no  remedy  will 

be  applied." 

This  still  remains  true.  The  danger  has  never  been 
understood,  so  no  remedy  could  be  applied  that  would 
attack  and  remove  the  cause  of  the  trouble. 

Starting  out  with  such  assurances  of  the  safety  and 
stability  of  our  currency,  it  seems  strange  that  in  the 
midst  of  so  short  an  address  the  former  Secretary  should 
follow  immediately  with  this  statement: 

"A  glaring  deftct  at  a  vital  point  will  sometime, 

sooner  or  later,   assert  itself.      Meantime   a   remedy 

should  be  discovered,  discussed,  and,  as  far  as  possible, 

agreed  upon,  so  that  it  may  be  promptly  applied  when 

the  people  are  ready  for  it." 

Mr.  Shaw  was  not  alone  in  knowing  that  a  glaring 
defect  existed.  However,  he  could  neither  locate  nor 
define  it. 

In  his  search  for  a  remedy  he  discarded  "Asset  cur- 
rency" as  commonly  understood,  and  was  correct  in  so 
doing,  because  no  method  had  been  devised  for  issuing 
asset  currency  on  a  safe  basis.  Emergency  currency  in 
the  form  of  clearing  house  certificates,  he  condemned  in 
the  following  words: 


THE  GOLD  STANDARD  185 

"The  United  States  originates  more  commerce  than 
any  other  country,  but  our  chief  commercial  city  is  not 
the  world's  clearing  house.  It  ought  to  be,  but  it  is 
not.  One  reason  why  it  is  not  is  the  fact  that  it  has 
sometimes  resorted  to  clearing  house  certificates,  which 
is  a  plea  of  guilty  to  an  indictment  charging  bad 
management  locally  or  bad  legislation  nationally,  and 
the  financial  world  charges  both.  Clearing  house  cer- 
tificates must  never  be  authorized  by  law." 
The  suggestion  here  that  with  a  strong  financial  sys- 
tem New  York  would  become  the  world's  financial  center 
should  be  noted. 

The  remedy  suggested  by  Mr.  Shaw  was  to  provide 
an  "emergency  currency"  by  permitting  the  national 
banks  to  increase  their  government-bond-secured  note 
issue  up  to  fifty  per  cent  over  their  bond  security  on 
which  excess  the  bank  should  pay  a  tax  of  five  or  six 
per  cent  and  the  government,  in  consideration  for  the 
tax,  should  guarantee  the  redemption  of  the  issue. 

His  remedy  proposed  that  the  printing  on  the  bank 
notes  be  changed  somewhat  so  that  the  extra  notes  could 
be  slipped  into  circulation  without  attracting  attention. 
The  last  sentence  of  Mr.  Shaw's  suggestion  should  be 
carefully  noted.  It  is  a  most  complete  but  unconscious 
indictment  of  our  system.  His  proposed  remedy  for  a 
"vital  defect"  was  as  follows: 

"By  eliminating  the  one  statement  on  the  present 
bank  note,  'This  note  is  secured  by  bonds  of  the 
United  States,'  the  additional  currency  could  be  made 
identical  with  that  based  on  Government  bonds.  The 
Comptroller  of  the   Currency   and   the  bank   issuing 


186  THE  STRANGLE  HOLD 

the  currency  would  alone  know  of  its  existence.  It 
would  not  advertise  its  existence  or  our  extremity." 
We  are  not  criticising  Mr.  Shaw's  remedy,  which  was 
tried  in  a  little  different  form  by  the  Emergency  Cur- 
rency Act  of  May  SOth,  1908,  and  which  has  in  a 
changed  form  been  utilized  by  the  Federal  Reserve  Act. 
But  the  suggestion  that  stealth  and  secrecy  are  neces- 
sary to  the  successful  operation  of  a  proposed  remedy 
for  our  financial  ills  completely  condemns  the  system. 
Stealth  and  secrecy  should  have  no  place  in  a  demo- 
cratic government,  and  a  financial  system,  which  because 
of  its  weakness  is  compelled  to  make  use  of  star  cham- 
ber methods,  is  a  menace  to  liberty  as  well  as  industry. 
This  address  of  former  Secretary  Shaw,  which  starts 
with  such  a  brave  defence  of  the  gold  standard  and  the 
stability  of  a  financial  system  based  on  it,  proves  on 
analysis  to  be  a  sweeping  condemnation  of  both.  Al- 
though using  his  best  endeavor  to  defend  and  even 
glorify  our  financial  system,  he  proves  conclusively  that 
the  gold  standard  fetish  is  a  lie  and  that  the  financial 
system  based  on  it  is  weak,  dangerous  and  degrading. 
Weak  because  the  silly  promise  of  gold  redemption 
makes  our  currency  non-elastic;  dangerous  because  "a 
glaring  defect  at  a  vital  point"  (meaning  the  gold  re- 
demption lie)  will  some  time,  sooner  or  later,  assert 
itself,  meaning  that  a  panic  will  ensue  when  the  lie  is 
discovered  by  the  people;  and  degrading  because  deceit 
must  be  resorted  to  to  cover  up  the  lie.  The  suggestion 
that  a  remedy  must  be  stealthily  and  secretly  applied 
is  an  unconscious  acknowledgment  that  our  whole  ex- 
change system  is  conceived  in  error.     Coming  from  the 


THE  GOLD  STANDARD  187 

source  it  does  it  proves  that  the  financial  world  is  just 
as  much  in  the  dark  as  the  rest  of  the  community  re- 
garding the  weakness  in  our  financial  system.  Appar- 
ently our  statesmen  and  financial  leaders  have  never 
seen  the  real  cause  of  the  unfavorable  phenomena  which 
reveals  itself  in  the  form  of  non-elasticity,  money  short- 
age, lack  of  efficiency,  industrial  turmoil  and  social 
unrest. 

Here  we  see  a  man,  holding  the  most  important  finan- 
cial position  in  the  United  States,  addressing  financiers, 
the  Bankers'  Association,  starting  with  a  congratulation 
as  to  the  strength  of  our  financial  system  and  ending 
with  a  suggestion  that  stealth  and  cunning  are  necessary 
to  overcome  a  "vital  defect."  If  this  paradox  were 
intended,  financial  humor  is  certainly  subtle. 


CIL\PTER  XII 
SPECULATION 

Because  of  the  fact  that  the  trade  centers  in  various 
staple  commodities — the  -wheat  pit,  the  cotton  market 
and  the  stock  exchange,  have  been  the  scene  of  the 
gain  and  loss  of  immense  fortunes,  most  good  folk 
have  come  to  consider  these  places  as  dens  of  iniquity 
run  by  unprincipled  crooks.  As  a  matter  of  fact, 
however,  this  is  not  the  case,  for  the  trade  that  gots 
on  in  these  centers  has  a  distinct  economic  value.  Were 
it  not  for  these  market  centers  trade  would  be  much 
more  difficult,  eratic  and  uncertain.  By  taking  the 
risk  of  gain  or  loss  off  the  shoulders  of  the  producers, 
the  speculators  give  a  degree  of  regularity  to  commerce. 
And  the  brokers  operating  in  the  various  markets  are 
equal  in  honesty  to  any  other  class  of  business  men.  In 
one  aspect,  indeed,  they  are  even  more  reliable,  since 
they  must  abide  by  the  rules  of  the  exchange  mart  in 
which  they  deal. 

But  while  the  brokers  themselves  may  be  honest,  there 
is  at  least  one  great  trade  center  in  which  the  game  is 
not  fair,  because  one  set  of  players  has  a  distinct  advan- 
tage over  the  others.  One  party  controls  the  wheel  of 
fortune,  as  it  were,  and  consciously  or  unconsciously, 
regulates  it  to  suit  certain  interests. 

The  trade  center  referred  to  is  the  Xew  York  Stock 
Exchange,  and  the  party  referred  to  includes  the  bank- 

188 


SPECULATION  189 

ing  interests.  The  unfair  condition  here  arises  partly 
from  the  custom  of  having  stock  on  margin,  as  will  be 
esplained,  but  its  real  origin  lies  in  that  same  defect 
in  our  financial  svstem  that  we  hare  come  to  recognize 
as  the  fountain  head  of  so  many  and  such  great  erils 
afflicting  our  modern  industrial  community. 

The  evil  in  the  stock  market  is  but  another  bad  result 
of  the  private  control  of  bank  credit,,  by  means  of  which 
the  banker,  being  able  to  withold  loans  regardless  of 
their  merits,  is  enabled  to  influence  prices  and  in  fact 
regulate  the  whole  current  of  business.  It  is  cumulative 
evidence  that  the  banker  dictates  every  man's  chance 
for  financial  and  industrial  success. 

Not  all  the  havoc  of  the  stock  market,  however,  can 
be  blamed  on  the  banker.  We  must  rersescber  thit  hs 
is  not  a  free  agent  for  his  acts  are  controlled  by  the 
reserve  requirement.  When  he  gets  up  against  his  re- 
serve his  credit  "freezes"  and  when  quite  a  number  of 
them  arrive  at  the  zero  point  about  the  same  time  it 
sends  a  decided  chill  down  the  spine  of  "Wall  Street." 

There  is  one  condition  noticeable  in  the  stock  ex- 
change, however,  which  points  to  an  unfair  control  of 
this  game.  This  condition  is  the  constant  fluctuation  in 
prices  of  stocks. 

It  is  not  uncommon  to  see  the  price  of  the  stock  of 
well  established  corporations  which  have  been  doing  a 
steady  business  for  years  and  paying  regular  dividends 
fluctuate  several  dollars  within  a  very  short  time.  The 
price  of  such  stocks  may  fall  violently  one  day  and  re- 
cover the  next,  and  a  week  or  a  month  may  show  a  very 
wide  range  of  prices. 


190  THE  STRANGLE  HOLD 

It  is  perfectly  clear  that  such  fluctuations  cannot 
be  due  to  any  change  in  the  real  or  intrinsic  value  of  the 
stock.  Neither  the  business  outlook  of  the  corporation 
nor  the  state  of  its  prosperity  could  possibly  change 
with  such  kaleidoscopic  rapidity  as  the  prices  quoted  on 
the  exchanges  would  suggest,  so  these  fluctuations  in 
price  are  not  due  to  the  changing  value  of  the  stock 
but  are  due  to  the  change  in  the  money  market. 

By  intrinsic  value  is  meant  the  actual  or  real  value  of 
the  securities,  dependent,  of  course,  upon  the  dividends 
or  interest  paid  on  these  securities,  coupled  with  the 
safety  of  the  principle  invested.  The  market  value  is, 
as  the  name  indicates,  the  price  at  which  the  securities 
are  bought  and  sold. 

This  market  value  may,  and  almost  invariably  does, 
differ  from  the  intrinsic  value,  and  it  may  do  so  to  a 
very  pronounced  degree.  The  existence  of  speculation 
in  securities  arises  entirely  from  this  difference  between 
intrinsic  and  market  values. 

It  is  the  fluctuation  in  price  that  attracts  the  gambler 
and  makes  a  game  of  chance  of  institutions  necessary 
in  our  business  and  commercial  life. 

As  has  been  shown  prices  fluctuate  with  the  volume 
of  the  medium  of  exchange  in  circulation  and  with  the 
interest  or  discoimt  rate  charged  for  its  use.  We  have 
seen  that  these  two  factors  are  entirely  in  the  bank- 
ers hands,  considering  of  course  his  limitations.  If  we 
can  hold  these  facts  in  mind,  while  we  examine  another 
factor  which  contributes  strongly  to  making  a  game  of 
chance  out  of  all  investment  and  business,  we  will  see 
just  what  is  at  the  bottom  of  price  fluctuation  and  how 


SPECULATION  191 

the  stock  exchange,  cotton  exchange  and  wheat  pit  are 
turned  from  legitimate  markets  into  gambling  games. 

The  other  factor  above  referred  to  is  the  trading  on 
margin  which  makes  up  a  considerable  proportion  of 
the  deals  on  these  exchanges.  When  a  margin  purchase 
is  made  the  customer  does  not  put  up  the  entire  pur- 
chase price  of  the  securities,  but  only  a  portion  thereof, 
say  twenty  or  thirty  per  cent.  The  broker  carries  the 
balance — virtually  loans  it  to  the  customer,  charging  in- 
terest on  the  amount  carried. 

If  the  stocks  dealt  in  happen  to  be  reliable  industrial, 
railroad,  or  mining  stocks,  the  broker  can  take  the  secur- 
ities which  he  has  purchased  for  his  client,  to  the  bank, 
and  put  them  up  as  collateral  for  a  loan  of  the  differ- 
ence between  the  margin  put  up  by  the  customer  and 
the  price  of  the  stock.  The  broker  borrows  this  money 
from  the  bank  on  call,  and  lends  it  to  the  customer 
on  margin.  That  is,  at  the  expiration  of  the  number  of 
days  notice  agreed  upon,  the  banker  can  call  upon  the 
broker  to  repay  the  loan.  This  notice,  as  agreed  upon, 
may  be  for  one,  two,  three  or  more  days.  On  the  other 
hand,  the  broker  requires  the  customer  to  keep  his  mar- 
gin good.  If  the  price  of  the  stock  declines,  the  cus- 
tomer must  put  up  additional  payments  to  keep  the 
same  margin  or  he  will  be  sold  out. 

Now  here  is  the  way  in  which  the  banker  secures  his 
Tinfair  advantage.  Supposing,  for  instance,  the  cus- 
tomer buys  1,000  shares  of  steel  at  $100  per  share  and 
puts  up  a  twenty  per  cent  margin,  or  $20,000.  The 
broker  may  now  do  either  of  two  things.  If  he  is 
square,  he  will  actually  purchase  the  stock  for  the  cus- 


192  THE  STRANGLE  HOLD 

tomer.  Otherwise  he  may,  as  the  term  is,  "bucket  the 
order,"  that  is,  he  will  give  the  customer  a  receipt  for 
the  1,000  shares,  without  actually  purchasing  them; 
he  will  be  taking  chances  on  being  able  to  buy  the  stock 
later  on  at  a  lower  price,  and  pocket  the  difference;  if 
the  stock  should  go  up,  he  would  have  to  lose  the  dif- 
ference. 

But  let  us  suppose  that  the  broker  is  honest,  and 
actually  purchases  the  stock.  Putting  up  the  twenty 
thousand  dollars  received  from  the  customer,  he  will 
order  the  stock  to  be  delivered  to  the  bank:  on  it,  as 
security,  he  will  borrow  the  balance  of  eighty  thousand 
dollars  and  pay  for  the  stock. 

Here  the  broker  is  in  the  clear.  He  runs  the  game, 
and  his  profit  consists  entirely  in  the  percentage  which 
he  takes  as  his  commission  or  brokerage,  just  as  does  a 
pool  seller  on  a  horse  race.  His  profit  being  certain, 
the  price  of  stocks  makes  no  difi'erence  to  him  so  long 
as  he  conducts  a  legitimate  business.  His  only  interest 
lies  in  the  volume  of  business  on  the  stock  exchange. 

The  real  game  is  between  the  banker,  who  puts  up 
the  eighty  thousand,  and  the  customer  who  puts  up  the 
twenty  thousand.  The  only  interest  the  banker  should 
have  is  to  get  his  money  back  with  interest.  But,  as  is 
most  likely,  he  may  be  playing  the  market  a  little  him- 
self ;  or  perhaps  some  of  his  clique  desires  to  obtain  a  lit- 
tle stock  at  a  cheap  price. 

Now  suppose  the  money  market  tightens  up,  sup- 
posedly due  to  any  one  of  a  great  number  of  reasons 
assigned  by  our  financial  lords,  but  in  reality  due  to  the 
fact  that  our  rulers  at  the  financial  center  have  caused 


SPECULATION  193 

it  through  cupidity  or  fear  or  because  the  limit  of  credit 
has  been  reached.  Just  a  word  is  suflScient  as  we  have 
seen  in  the  case  of  automobile  credits. 

The  banker  adds  to  the  money  shortage  by  calling 
in  the  particular  loan  of  eighty  thousand  dollars  along 
with  other  loans  aggregating  several  million. 

Neither  the  broker  nor  the  customer  can  borrow  money 
in  a  tight  money  market.  Others  are  in  a  similar  posi- 
tion, and  their  efforts  to  borrow  lessens  the  value  of  the 
security  offered,  the  price  of  which  falls  on  the  ex- 
change. 

As  a  result,  the  broker  must  call  on  his  customer  to 
put  up  more  margin.  Some  are  able  to  do  so,  but  others 
cannot.  The  broker  has  to  sell  the  stock  to  pay  the 
banker's  loan ;  the  customer  is  thus  squeezed  out,  and 
the  stock,  thrown  on  a  declining  market,  accelerates 
the  decline,  and  results  in  a  call  for  more  margin  from 
those  still  in. 

More  customers  are  frozen  out,  until  finally  the  price 
reaches  bedrock.  Now  the  banker  and  his  friends,  the 
big  traders,  step  in,  and  grab  the  stock  which  the  cus- 
tomers could  not  protect  by  putting  up  the  margins. 
The  tight  money  market  and  the  resulting  stock  flurry 
are  a  result,  merely,  of  the  fact  that  the  banker  had 
stopped  his  mint:  he  ceased  making  loans.  Now  that 
his  clique  are  in  possession  of  the  stocks,  he  again 
lends  money,  or  in  other  words,  mints  bank  credit.  With 
this,  his  friends,  the  inside  ring,  buy  more  stock.  As  a 
result,  the  prices  go  up  and  soon  the  market  is  ready 
for  another  set  of  customers  who  come  to  be  divested 
of  their  money,  as  sheep  to  the  shearing. 


194  THE  STRANGLE  HOLD 

The  game  is  well  arranged,  and  certainly  more  digni- 
fied and  orderly  than  a  horse-race,  for  it  runs  during 
every  business  day  in  the  year,  and  its  results  are  more 
certain  than  the  results  of  the  races.  The  banker  has  a 
handle  which  operates  this  wheel  of  fortune,  and  which 
practically  eliminates  the  factor  of  chance  or  uncertainty, 
as  far  as  the  insider  is  concerned.  This  handle  is  known 
as  "call  money."  It  works  like  a  pump  handle.  When 
it  is  pushed  down,  that  is,  when  call  money  is  cheap,  up 
go  stocks.  When  it  is  pushed  up,  that  is,  when  the 
banker  refuses  to  make  loans,  or  the  discount  rate  on 
call  money  is  raised,  stocks  go  down. 

Every  one  knows  that  the  more  rapidly  you  move  a 
pump  handle  up  and  down  the  more  water  you  pump 
and  it  is  just  as  certain  that  the  more  rapidly  you  move 
prices  up  and  down  the  more  gambling  you  produce.  Of 
course,  the  brokers  all  know  this,  and  some  of  the  bank- 
ers may,  and  in  order  to  make  the  game  lively,  and  in- 
crease their  profits,  the  bankers  of  New  York  allow  a 
committee  of  brokers  on  the  stock  exchange  to  fix  the 
rate  on  call  money.  This  committee  pumps  vigorously 
by  varying  the  rate  from  five  or  six  to  as  high  as  thirty 
per  cent.  It  is  fixed  every  day  and  all  the  banks  are 
notified  of  the  change.  This  makes  the  price  of  stocks 
fluctuate  and  gives  the  insiders  a  chance  to  get  their 
money  down  right. 

No  doubt  there  is  some  reason  for  changes  in  the  rate 
on  call  money,  but  if  it  were  not  changed  prices  would 
not  fluctuate  so  rapidly  nor  so  violently  and  the  gambling 
element  in  the  country  would  not  be  attracted.  In  that 
case  the  business  of  these  trade  marts  would  be  greatly 


SPECULATION  195 

decreased  for  the  business  would  be  conlined  to  legitimate 
trade.* 

As  the  banker  alone  controls  this  handle,  he  likewise 
operates  the  wheel  of  fortune.  But  as  the  brokers  de- 
pend on  the  amount  of  trade  or  the  turn  over  of  the 
exchange  and  as  this  volume  depends  on  the  gambling 
spirit  excited  by  the  fluctuations  in  prices  it  is  both  con- 
venient and  effective  to  have  the  call  money  rate  £xed 
by  the  brokers. 

We  headed  this  chapter  "Speculation"  but  the  result 
of  operations  on  the  exchange  seems  to  be  almost  too 
definite  to  be  so  designated.  This  game,  if  we  may  still 
consider  it  a  game  of  chance,  has  several  advantages 
over  others  we  have  known.  For  instance,  none  of  the 
players  see  each  other,  and  no  one  is  to  blame,  and  so 
no  sympathy  is  wasted  on  the  losers.  The  broker,  the 
only  man  in  sight,  has  collected  two  commissions — one 
for  buying  the  stock,  the  other  for  selling  out  the  cus- 
tomer. The  stock  is  back  to  its  former  price,  and  the 
only  difference  is  that  the  customer's  money  is  in  the 
pockets  of  the  banker  or  of  his  friends,  the  insiders. 

To  point  out  this  aspect  of  the  game  to  the  banker, 
and  show  him  that  he  had  committed  a  most  cowardly 
robbery,  would  hurt  him  and  surprise  him  beyond  meas- 
ure. We  should  not  blame  him,  for  he  is  a  most  re- 
spectable and  kindly  gentleman,  and  this  aspect  has 
never  occurred  to  him.  In  fact  ignorance  is  the  only 
excuse  that  can  be  advanced  in  his  favor.  He  operates 
the  pump-handle  for  the  most  part  unconsciously,  so  in 


*See  Appendix. 

(Note  changes  reported  by  Comptroller)  Page  306. 


196  THE  STRANGLE  HOLD 

the  operation  of  the  game  the  banker  is  generally  iiuio- 
cent  of  any  evil  intent. 

Reserve  requirements  are  for  the  purpose  of  perpetu- 
ating the  belief  that  credits  are  payable  in  money  and 
for  the  purpose  of  continuing  the  gold  standard  fallacy, 
as  has  been  demonstrated.  Both  these  fictions  remain 
from  the  time  when  the  goldsmith  was  the  banker.  The 
whole  reserve  system  was  instituted  to  cover  up  the  gold- 
smith's deception,  and  is  still  in  force  to  perpetuate 
the  banker'  control  and  furnish  him  an  excuse  for  re- 
fusing loans.  Both  the  gold  standard  and  the  reserve 
system  have  been  stretched  to  the  limit,  and  are  ready 
for  the  waste-basket. 

But  until  these  fallacies,  and  the  other  features  of  xm- 
soundness  in  our  financial  system  are  eliminated,  the 
game  we  have  just  illustrated,  and  the  evils  we  have 
shown  to  follow  therefrom^  will  continue. 

With  the  proposed  remedy,  however,  the  whole  aspect 
of  affairs  would  be  changed.  As  we  have  shown  how  the 
other  evils  would  disappear,  so  would  this  one  also  van- 
ish. For  we  have  seen  that  "call  money"  is  the  means  by 
which  this  unfair  condition  is  made  possible.  Under  the 
proposed  change  in  our  financial  system  there  would  be 
no  such  thing  as  "call"  money.  There  would  be  no  lack 
of  public  confidence  to  guard  against,  and  so  the  need 
of  loaning  money  on  "call"  would  disappear;  the  con- 
trolling handle  would  be  removed  from  the  wheel  of  for- 
tune, and  it  would  run  free. 

What  little  speculation  still  remained  would  be  a  real 
game  of  chance  dependent  upon  judgment  and  the 
exigencies  of  trade  and  production. 


SPECULATION  197 

A  similar  improvement  would  apply  to  trade  in  the 
other  commercial  centers — the  wheat  pit  and  the  cotton 
exchange.  These  marts  would  thrive  as  centers  for  in- 
vestment and  trade,  where  people  could  transact 
legitimate  business.  The  changes  in  the  volume  of  the 
circulating  medium  would  cease,  and  with  them  the  re- 
sulting violent  fluctuations  which  invite  the  gambler  and 
enrich  the  sure-thing  speculator.  Instead  of  the  present 
artificial  fluctuations  in  price,  we  would  have  variations 
in  real  values  only,  due  to  legitimate  changes  in  business 
enterprise.  The  movement  of  prices  would  result  from 
differences  in  business  ability,  and  from  the  laws  of  sup- 
ply and  demand,  but  the  violent  fluctuations  arising  out 
of  the  banker's  cupidity,  fear,  lack  of  enterprise,  or 
manipulation  of  call  money,  would  no  longer  make  of 
business  a  gambling  game. 


CHAPTER  XIII 
RURAL  CREDITS 

FROM  time  to  time  in  the  history  of  this  country 
political  parties  have  arisen,  such  as  the  green- 
back party  and  later  the  populist  and  silver  parties, 
which  advocated  financial  reform.  The  remedies  invari- 
ably suggested  inflation. 

At  one  time  the  continuance  of  large  greenback  issues 
was  suggested,  at  another,  free  coinage,  as  a  means  of 
increasing  the  money  supply.  Invariably  these  reforms 
resembled  each  other,  in  that  they  attacked  the  symptoms 
rather  than  the  cause  of  the  poor  financial  conditions. 
Owing  to  the  latter  fact  the  remedies  proposed  would 
not  have  removed  the  cause  of  our  financial  and  indus- 
trial ills. 

But,  these  political  parties,  during  their  time,  were 
strongly  supported  by  the  farmers.  Offhand  it  might  be 
inferred  that  the  financial  interests  of  the  farming  ele- 
ment are  opposed  to  those  of  the  rest  of  the  community, 
because  farmers  have  always  been  ready  to  support  par- 
ties proposing  financial  measures.  As  a  matter  of  fact, 
however,  this  conclusion  would  be  far  from  the  truth. 

The  real  reason  for  the  support  given  these  proposals 
by  the  farmers  is  due  to  the  fact  that  the  evils  of  our 
present  financial  system  fall  heaviest  upon  the  agricul- 
tural interests.  Those  engaged  in  agricultural  pursuits, 
being  the  more  keenly  conscious  of  the  ills  of  the  pres- 

198 


RURAL  CREDITS  199 

ent  system,  are  the  more  eager  for  relief,  and  so  more 
readily  responsive  to  suggested  reforms. 

In  truth,  the  interests  of  the  farmers  are  identical 
with  the  interests  of  the  rest  of  the  community — except- 
ing those  of  the  parasites  who  profit  by  the  farmers' 
present  ills. 

It  is  a  truism  to  say  that  agriculture  is  the  funda- 
mental activity  of  the  world,  upon  which  all  industries 
rest.  Consequently  it  follows  from  this  truism  that  any 
measure  which  increases  the  producing  power  of  the 
farmer,  is  by  that  very  fact  a  benefit  to  the  community 
2iS  a  whole. 

In  other  words,  it  is  to  everybody's  interest  that  the 
farmer  should  be  able  to  secure  the  funds  necessary  to 
carry  on  his  business  with  an  ease  equal  at  least  to  that 
of  any  other  producer.  And  yet  equal  financial  facility 
is  far  from  being  the  condition  under  our  present  system. 

The  difficulty  experienced  by  the  farmer  in  getting 
adequate  credit  facility  is  proverbial.  And  even  under  the 
Federal  Reserve  System  no  adequate  provision  was  made 
for  agricultural  interests.  This  fact  was  practically  ad- 
mitted by  the  passage  of  the  Farm  Loan  Act,  following 
an  inefi'ectual  attempt  of  the  Federal  Reserve  Board  to 
serve  the  farmers  of  the  coimtry  through  the  national 
banks. 

It  may  be  well  to  state  that  the  attempt  on  the  part 
of  the  Federal  Reserve  Board  failed  for  two  reasons. 
The  first  of  these  is  that  the  member  banks  found  it  dif- 
ficult to  serve  the  interests  of  the  farmer  and  their  own 
interests  at  the  same  time. 

The  second  reason  is  that  private  control  puts  a  time 


200  THE  STRANGLE  HOLD 

lock  on  the  bank's  credit  which  the  farmer  cannot  work. 
The  meaning  and  force  of  these  causes  will  be  explained 
in  the  following  pages. 

But  the  effect  of  the  failure  was  the  passing  by  the 
Federal  Government  of  the  Farm  Loan  Act,  an  act  spe- 
cifically intended  to  deal  with  the  credit  requirements 
of  agriculture.  This  act  has  fallen  short  of  its  purpose, 
as  will  be  shown  presently,  but  irrespective  of  its  suc- 
cess or  failure,  we  may  inquire  as  to  the  implication  of 
this  special  act. 

Is  it  not  an  acknowledgment  that  agriculture,  upon 
which  all  other  commercial  activities  depend,  is  prac- 
tically outlawed  under  the  present  financial  system .''  And 
does  it  not  seem  to  imply  that  the  farmer,  like  the 
Indian,  is  a  ward  of  the  government? 

Singling  the  farmer  out  from  the  rest  of  the  busi- 
ness world  as  this  rural  credit  legislation  does,  it  sug- 
gests that  he  is  a  kind  of  financial  weakling,  unable  to 
take  care  of  himself,  and,  therefore,  a  fit  subject  for 
special  governmental  care. 

Let  us  see  whether  such  an  impression  is  in  any  way 
justified.  Let  us  compare  the  manner  in  which  the 
farmer  has  run  his  business — that  of  providing  food,  or 
taking  care  of  the  food  requirements  of  the  country — 
with  the  way  the  banker  has  rim  his  business,  the  busi- 
ness of  taking  care  of  the  credit  requirements  of  the 
country. 

From  1837  to  1907,  as  we  learned,  a  disastrous  finan- 
cial panic  occurred  on  an  average  of  once  every  ten 
years,  with  several  money  stringencies  in  between  the 
times  of  panic. 


RURAL  CREDITS  201 

Since  the  banks  have  displaced  government  money  by 
bank  credit  it  is  the  banker's  business  to  supply  the 
nation's  commerce  and  industry  with  an  adequate  amount 
of  the  medium  of  exchange,  and  the  bankers  are  plainly 
at  fault  when  this  medium  is  not  adequately  supplied. 

Consequently,  this  decennial  breakdown  of  the  finan- 
cial system  suggests  a  considerable  degree  of  inefficiency 
on  the  part  of  those  who  have  assumed  the  responsibil- 
ity of  supplying  the  medium  of  exchange. 

A  breakdown  of  the  agricultural  system  in  any  way 
comparable  with  the  oft-repeated  collapse  of  the  finan- 
cial system  would  have  meant  dire  famine  throughout 
the  land.    Such  a  famine  has  not  once  occurred. 

While  the  banker  has  repeatedly  failed  to  supply  us 
with  a  medium  of  exchange  adequate  to  the  needs  of  the 
business  of  the  country,  thereby  bringing  loss  and  mis- 
ery, not  only  upon  himself,  but  upon  the  entire  nation, 
the  farmer  has  meanwhile  gone  steadily  on,  supplying 
to  the  country,  year  after  year,  its  requisite  food  supply. 

Considering  achievement,  therefore,  there  is  no  jus- 
tification for  the  assumption  that  the  farmer  is  less 
capable  financially  than  other  producers.  The  fact  that 
the  government  is  obliged  to  establish  a  special  institu- 
tion to  take  care  of  his  financial  necessities  is  clearly  not 
due  to  any  fault  of  his. 

After  a  consideration  of  the  foregoing,  are  we  not  jus- 
tified in  placing  a  charge  of  inefficiency  against  the 
banker,  rather  than  against  the  farmer,  for  the  failure 
of  the  present  financial  system  to  supply  proper  credit 
facilities  for  agricultural  enterprises  ?  As  we  shall  show, 
this  assumption  is  entirely  correct. 


202  THE  STRANGLE  HOLD 

But  for  the  present  let  us  note  how,  through  our  gov- 
ernment, we  have  treated  these  two  different  groups, 
the  farmers  and  the  bankers.  Let  us  make  a  comparison 
of  the  help  given  by  the  nation  to  the  banker  with  that 
given  to  the  farmer. 

After  the  bankers  had  made  experiments  at  the  na- 
tion's expense,  going  even  to  the  extent  of  issuing 
clearing  house  certificates  in  open  defiance  of  the  laws 
of  the  land,  the  country  came  to  their  rescue  and  placed 
the  credit  of  the  United  States  back  of  their  credit 
through  the  Federal  Reserve  System.  If  the  bank  now 
trades  a  little  too  much  on  its  credit  and  finds  that  cur- 
rent funds  are  needed  to  conduct  business  safely  and 
profitably,  there  is  at  hand  an  institution,  supplied  with 
practically  an  unlimited  amount  of  government  money 
which  it  will  exchange,  dollar  for  dollar,  for  the  notes 
and  drafts  and  other  commercial  paper  that  the  banker 
has  purchased. 

But,  although  the  Federal  Reserve  System  furnished 
the  banker  with  ideal  facilities,  the  law  did  not  require 
him  to  use  any  of  his  own  time  or  to  assume  any  respon- 
sibility in  its  establishment  or  operation.  The  only  re- 
quirement was  that  he  make  an  investment  of  six  per 
cent  of  his  capital  and  surplus,  on  which  he  was  assured 
a  six  per  cent  cumulative  dividend. 

But  note  the  difference  in  the  case  of  the  farmer.  In 
order  that  he  may  take  advantage  of  the  Farm  Loan  Act, 
the  farmer  must  get  nine  other  farmers  in  the  neighbor- 
hood to  join  with  him,  all  of  whom  measure  up  to  cer- 
tain definite  qualifications.  These  ten  must  then  incor- 
porate a  "National  Farm  Loan  Association,"  a  banking 


RURAL  CREDITS  203 

institution  which  they  must  officer  and  manage,  although 
banking  is  entirely  foreign  to  their  business  experience. 
They  are  then  required  to  subscribe  to  the  stock  of  this 
association  five  per  cent  of  the  aggregate  sum  the  asso- 
ciation wishes  to  borrow. 

This  subscription  carries  with  it  a  stockholder's  liabil- 
ity which  cannot  be  evaded,  as  the  holders  are  not  pet- 
mitted  to  sell  their  stock.  When  all  this  complicated 
business  is  done,  the  farmer  may  borrow  from  one  hun- 
dred to  ten  thousand  dollars  on  a  mortgage  payable  in  a 
definitely  prescribed  way  in  not  less  than  five  nor  more 
than  forty  years,  and  the  money  borrowed  may  be  used 
for  only  a  few  specified  purposes  and  for  none  other. 

These  provisions  are  such  that  the  farmer  who  needs 
money,  unless  to  clear  an  existing  mortgage,  probably 
would  have  to  go  outside  to  borrow  funds  for  the  re- 
quired subscription  to  the  Farm  Loan  Association  stock. 
If  the  farmer's  condition  and  needs  meet  the  rigid  re- 
strictions of  the  loan,  he  may  borrow  to  pay  for  land, 
buildings  and  implements  which  constitute  his  plant;  but 
no  provision  is  made  for  working  capital. 

Now  farming  requires  financing  on  terms  similar  to 
other  manufacturing  industries.  Two  prime  factors  en- 
ter into  the  building  and  operating  of  any  manufacturing 
enterprise.  First,  there  must  be  capital  to  pay  for  the 
site,  construct  the  buildings,  and  supply  the  machinery 
of  the  plant.  Secondly,  there  must  be  funds  for  opera- 
tion. The  second  requirement  is  fully  as  important  as 
the  first,  for  many  well-planned  and  completely  equipped 
manufacturing  enterprises  have  failed  for  the  lack  of 
adequate  working  capital. 


204  THE  STRANGLE  HOLD 

Now  the  Farm  Loan  Act  was  doubtless  an  attempt  to 
meet  the  farmer's  financial  necessities.  Its  principal  ob- 
ject, however,  as  stated  in  the  title  of  the  act,  seems  to 
be — "to  create  standard  forms  of  investment  based  on 
farm  mortgages,"  giving  only  a  minor  place  to  the 
ostensible  object,  "to  provide  capital  for  agricultural  de- 
velopment." In  this  way  the  interests  of  the  farmer  are 
made  incidental  only  to  those  of  the  investor. 

Therefore,  as  a  remedy  for  the  extremely  unsatis- 
factory financial  condition  of  the  farmer,  the  Farm  Loan 
Act  is  far  from  being  successful.  For  while  it  attempts 
in  a  fashion  to  supply  capital  for  the  farm  plant  and 
equipment,  it  not  only  fails  to  supply  working  capital, 
but  makes  it  increasingly  difficult  to  obtain  the  necessary 
current  credit  after  supplying  funds  for  the  plant  and 
accessories. 

At  a  signal  of  distress,  the  country  came  to  the  rescue 
of  the  banker  with  the  Federal  Reserve  System,  which 
supplied  him  with  a  completely  equipped  institution 
backed  by  the  credit  of  the  nation  and  ready  to  serve, 
him  without  cost  of  time,  money  or  responsibility. 

But  the  plea  of  the  farmer  was  answered  by  throw- 
ing him  a  bunch  of  red  tape  and  a  few  dollars  out  of 
which  he  was  supposed  to  fashion  an  institution  which 
would  supply  his  special  needs.  So  many  conditions  were 
attached  to  the  money,  finally  supplied,  that  few  farmers 
could  take  advantage  of  the  opportunity  to  secure  it. 
Those  who,  after  much  labor,  erected  such  an  institution, 
found  that  it  met  but  half  their  needs  at  best,  and  this 
need  was  not  the  portion  of  greater  necessity  to  the  ma- 
jority of  farmers,  which  was  for  working  capital. 


RURAL  CREDITS  205 

Suppose  a  limb  of  the  human  body  suffered  because  an 
arterial  stricture  shut  off  its  required  supply  of  the  life- 
giving  fluid.  Would  surgeons  attempt  to  cure  the  af- 
fected limb  by  amputating  it  and  expecting  it  to  live  and 
prosper  by  setting  up  its  own  circulatory  system?  Yet 
this  is  in  reality  what  the  Farm  Loan  Act  does,  for 
our  medium  of  exchange,  whether  it  be  gold,  govern- 
ment paper,  or  bank  credit,  is  the  life-blood  of  the 
nation.  Because  of  a  stricture  in  the  circulation  of  our 
medium  of  exchange,  the  Farm  Loan  Act  severs  the 
agricultural  limb  from  the  national  body,  and  expects  it 
to  lead  a  separate  existence. 

And  what  is  still  worse,  this  Farm  Loan  Act  does  not 
even  do  what  it  sets  out  to  do.  In  farming,  as  in  every 
other  industry,  two  financial  elements  are  required  for 
success.  The  Farm  Loan  Act  attempts  to  provide  for 
only  one,  and  makes  the  securing  of  the  other  more 
difficult. 

It  requires  the  farmer  to  organize  and  operate  Farm 
Loan  Associations  that  he  may  secure  a  part  of  the  first 
element  of  success — a  plant — and  this  very  act  hinders 
him  in  securing  the  second  element,  working  capital. 

Our  farmers  have  conquered  the  wilderness  and  have 
carried  the  light  of  civilization  and  the  little  red  school 
house  across  a  vast  continent;  they  have  fought  and  won 
battles  for  freedom  in  the  past  and  have  proved  a  great 
factor  in  the  world  struggle  just  ended.  Therefore,  to 
single  them  out  of  the  community,  as  the  Farm  Loan  Act 
does,  and  expect  them  to  set  up  and  put  into  successful 
operation  a  banking  institution  which  creates  a  separate 
financial  world,  wherein  they  must  live  and  prosper,  is 


206  THE  STRANGLE  HOLD 

adding  insult  to  injury^  and  imposes  on  them  an  un- 
warranted task. 

From  the  time  the  farmer  puts  the  plow  into  the 
ground,  to  the  time  his  crop  reaches  the  market,  he  is 
beset  by  insect  and  animal  pests  and  by  weather  con- 
ditions, labor,  and  transportation  difficulties. 

When  his  product  finally  does  arrive  at  the  market,  he 
is  met  by  the  speculator.  This  Ishmaelite,  aided  and 
abetted  by  our  financial  system,  takes  a  liberal  and  easy 
toll  from  what  has  been  produced  by  hard  physical  toil 
and  unremitting  care. 

The  farmer  who  survives  these  natural  and  financial 
enemies  must  be  a  hardy  individual,  justly  entitled  to 
be  considered  the  bone  and  sinew  of  the  nation. 

But,  as  if  this  were  not  enough,  the  Farm  Loan  Act, 
as  we  have  seen,  requires  the  farmer  to  provide  his  own 
credits.  Supplying  credit  is  clearly  the  banker's  busi- 
ness; and,  as  if  he  had  not  enough  burdens  already,  the 
farmer  is  required  to  take  over  the  banker's  work  also. 

The  farmer  should  not  be  compelled  to  provide  his 
own  system  of  financing  any  more  than  the  banker 
should  be  compelled  to  grow  his  own  food. 

Division  of  labor  is  requisite  to  civilization,  and  it  is 
the  farmer's  function  to  supply  food  and  raw  material. 
The  banker,  in  common  with  all  other  members  of  society, 
is  dependent  upon  the  farmer  for  food  and  clothing,  just 
as  all  other  elements  of  society  are  dependent  upon  the 
banker  for  the  medium  used  in  exchanging  goods  and 
services. 

The  banker's  dependence  upon  the  farmer  is  not  so 
direct,  and  is,  therefore,  not  so  easily  controlled,  nor  so 


RURAL  CREDITS  207 

keenly  felt,  but  it  can  be  clearly  seen,  however,  if  one 
pictures  a  situation  wherein  the  banker  would  be  forced 
to  produce  that  which  the  farmer  might  choose  to  refuse 
hira. 

Now  then  it  is  certain  that  just  as  it  is  the  farmer's 
function  to  provide  us  with  food  and  raw  materials,  so 
it  is  the  banker's  function  to  provide  all  with  the  medium 
of  exchange.  The  failure  of  the  banker  to  supply  the 
farmer  with  proper  credit  facility  on  terms  similar  to 
those  extended  to  the  other  producers,  is  due  to  inef- 
ficiency on  the  part  of  the  banker  and  is  no  fault  of 
the  farmer.  Yet  the  result  of  the  flaw  in  our  system 
has  been  to  make  the  farmer  a  financial  nuisance  to  the 
banker,  and  a  subject  for  governmental  care. 

But  in  this  phase  of  the  general  situation,  as  in  all 
those  we  have  already  dealt  with,  the  real  cause  of  the 
trouble  is  neither  with  the  banker  nor  the  farmer. 

It  is  in  the  fundamental  fault  of  the  system.  It  arises 
out  of  that  defect  in  our  present  financial  arrangement 
that  is  responsible  for  all  other  evils — the  defect  of  pri- 
vate control,  and  its  inability  to  endow  bank  credit  with 
a  full  measure  of  public  confidence. 

To  prove  our  case,  let  us  compare  the  situation  of  a 
farmer  with  that  of  a  manufacturer. 

A  shoe  manufacturer,  for  instance,  having  the  tech- 
nical knowledge,  the  machinery  and  tools  necessary  and 
enough  money  to  pay  a  month's  rent  in  advance,  can 
start  a  factory  with  assurance  of  success,  because  he  is 
able  to  use  the  present  financial  system.  In  addition  to 
his  plant  he  needs  leather  and  labor.  To  secure  the 
leather,  the  manufacturer  simply  orders  it  and  when  it 


208  THE  STRANGLE  HOLD 

arrives  he  "accepts"  a  draft  for  the  price  payable  to  the 
vendor  within  thirty  to  ninety  days.  This  draft  is  called 
an  "acceptance,"  which  the  leather  dealer  may  discount 
at  his  bank  for  cash. 

Our  shoemaker  next  employs  labor  and  begins  to  turn 
out  shoes.  If  he  has  a  reputation  as  a  successful  shoe 
manufacturer  almost  any  commercial  bank  will  provide 
the  money  (or  most  of  it)  to  carry  his  payroll — for 
thirty  days  or  more.  During  this  period  he  gets  goods 
ready  for  the  market.  Then  he  sells  the  shoes  at  a  price 
that  covers  the  cost  of  leather,  labor,  rent  and  profit  and 
draws  a  draft  on  the  purchaser,  who  writes  "accepted" 
across  the  face  of  it  and  signs  his  name.  This  paper,  the 
manufacturer  turns  into  his  bank,  where  it  is  discounted 
for  cash.  Out  of  the  proceeds  of  this  draft,  the  manu- 
facturer pays  the  bank  the  money  advanced  for  the  pay- 
roll and  the  acceptance  for  the  leather,  besides  taking 
care  of  the  coming  month's  rent.  Furthermore,  he  still 
retains  a  profit  that  he  is  not  compelled  to  turn  over  to 
a  speculator. 

To  start  this  manufacturing  business,  we  grant  that 
the  shoemaker  had  a  technical  knowledge  of  shoe  mak- 
ing, some  equipment,  enough  money  to  pay  a  month's 
rent  and  the  incidentals  for  sixty  days.  The  bank,  how- 
ever, did  the  rest,  and  was  glad  to  get  the  business. 

Now  the  farmer  is  a  manufacturer,  just  as  surely  as 
the  shoemaker.  He  takes  the  raw  material  in  the  form 
of  seeds  and  live  stock,  and  through  labor  applied  to 
the  soil  and  the  care  of  animals,  he  produces  goods  for 
the  market.  Provided  he  is  equally  capable  in  his  line, 
and  enjoys  an  equal  reputation  for  success  and  honesty. 


RURAL  CREDITS  209 

is  it  not  clear  that  he  should  have  the  privilege  of  doing 
business  in  the  same  manner  as  the  shoemaker?  And  in 
fact,  his  property,  business  stability,  efficiency,  and  his 
record  for  meeting  his  obligations,  are  such  as  justly  to 
entitle  him  to  ask  credit  from  the  banker  on  the  same 
terms  as  those  upon  which  other  lines  of  endeavor  are 
financed. 

At  present,  this  privilege  is  denied  him.  As  we  now 
see,  it  is  by  no  means  his  fault.  Nor  is  it  the  fault 
of  the  banker.  It  is  the  fault  of  the  banking  system, 
which,  owing  to  a  lack  of  public  confidence  due  to  pri- 
vate control,  is  forced  to  set  a  time  limit  of  thirty,  sixty 
and  ninety  days  for  commercial  credits. 

Unlike  other  producers,  the  farmer  is  dependent  upon 
nature,  and  cannot  produce  his  goods  within  ninety  days. 

If  the  banker  could  put  one  hundred  per  cent  con- 
fidence into  his  credit,  and  keep  it  there,  no  time  limit 
for  credit  would  be  necessary  nor  would  reserve  require- 
ments, which  limit  the  amount  of  bank  credit,  then  be 
necessary. 

If  after  securing  public  confidence  the  banker  were 
required  to  treat  all  applicants  for  loans  alike,  there 
would  be  no  necessity  for  rural  credit  institutions,  nor 
for  a  government  financing  corporation  such  as  we  had 
during  the  war  and  which  has  been  reinstated  recently. 
In  that  case  everyone,  farmers  included,  would  be  en- 
abled to  make  such  use  of  the  medium  of  exchange  as 
their  business  justified. 

But  until  the  people  know  that  every  dollar  of  credit 
issued  by  the  bank  is  based  on  safe  and  ample  security, 
they  will  not  have  complete  confidence  in  bank  credit. 


210  THE  STRANGLE  HOLD 

And  until  this  one  hundred  per  cent  confidence  is  at- 
tained, commercial  banks  will  have  to  base  their  loans 
on  "liquid"  assets  and  will  have  to  continue  to  limit 
their  loans  to  thirty,  sixty  and  ninety  days.  This  limit 
of  time  will  continue  to  make  commercial  banks  useless, 
or  almost  so,  to  the  farmer,  the  exporter,  and  to  nearly 
all  other  business  interests  requiring  a  longer  use  of 
credit. 

Securities  now  may  be  perfectly  good,  and  yet  may 
not  be  liquid.  Of  these  the  banker  will  say:  "It  is  a 
good,  but  not  a  bankable,  security." 

Statistics  show  that  the  farmer's  security  is  good.  It 
is  not  bankable,  however,  because  he  must  have  money 
for  longer  than  ninety  days. 

The  banker,  not  being  able  to  command  sufEcient  pub- 
lic confidence,  cannot  safely  issue  his  credit  for  a  longer 
period. 

Since  the  banker  "issues"  practically  all  of  our  me- 
dium of  exchange,  the  farmer  is  through  this  defect,  and 
through  no  fault  of  his  own,  outlawed  by  our  present 
financial  system. 

As  the  farmer  is  an  important  member  of  society,  and 
since  the  banker  had  to  eliminate  him  to  insure  his  own 
safety.  Congress  created  a  special  institution  supposedly 
for  his  benefit. 

While,  therefore,  the  Farm  Loan  Act  would  seem  to 
be  for  the  farmer's  benefit  and  implies  inefficiency  on  his 
part,  in  reality  its  purpose  is  to  relieve  the  banker  of  a 
duty  that  is  plainly  his.  It  is  in  truth  a  relief  meas- 
ure for  the  banking  interests  and  a  token  of  the  banker's 
inability,  and  not  one  to  relieve  the  farmer  nor  is  it  due 


RURAL  CREDITS  211 

to  any  inefficiency  on  his  part.  Let  us  see  what  the 
present  situation  leads  to. 

Thirty,  sixty  and  ninety  day  money  will  not  raise  and 
harvest  a  crop  or  carry  live  stock  during  its  period  of 
growth.  But  it  will  enable  a  middle  man  to  market 
harvested  crops  and  matured  stock. 

So  here  we  see  our  present  system  opposing  the  best 
interests  of  the  community  and  the  banker  unconsciously 
standing  in  league  with  the  despoiler. 

The  middle  man  knows  how  to  use  short  time  money 
and  how  to  get  it  from  the  commercial  banks,  so  he  takes 
a  slice  from  the  profit  which  rightfully  belongs  to  the 
farmer,  and  extracts  additional  tribute  from  the  con- 
sumer, without  contributing  one  fraction  of  a  mill  to  the 
value  of  the  product. 

Our  whole  financial  system  is  framed  for  the  benefit 
of  this  go-between,  while  the  farmer,  upon  whom  the 
community  depends,  remains  an  economic  outcast  be- 
cause of  his  inability  to  get  inside  the  banker's  time 
limit. 

And  there  is  yet  a  further  effect  of  this  stt  of  circum- 
stances, in  that  a  second  reason  is  furnished  which  will 
cause  present  conditions  to  continue  to  prevail  under  the 
existing  financial  system. 

In  the  first  place,  the  bank  must  maintain  a  bulkhead 
of  liquid  assets  against  a  possible  decrease  in  public  con- 
fidence; and  a  twelve,  eighteen,  or  twenty- four  months' 
note  signed  by  a  farmer,  who  is  unknown  to  the  commu- 
nity, is  not  a  liquid  asset. 

The  second  reason  is  that  the  banker  makes  a  greater 
profit   by   dealing   with  the   speculator   than    with   the 


512  THE  STRANGLE  HOLD 

farmer;  and,  since  a  bank  is  a  private  institution,  so 
long  as  it  is  permitted  to  serve  private  interests  without 
regard  to  public  welfare,  it  will  naturally  seek  the  source 
of  larger  profits. 

With  regard  to  this,  it  is  true,  and  happily  so,  that 
individual  bankers  are  not  now  so  generally  seeking  "ex- 
tra profits"  as  in  times  past.  Nevertheless,  those  who  so 
desire  can  still  align  themselves  with  speculators  in  a 
combination  which  stands  both  farmer  and  consumer  on 
their  heads  and  shakes  the  money  out  of  their  pockets. 

Now  the  only  difference  between  the  bank  credit  re- 
quired by  the  farmer  and  that  supplied  to  the  merchant 
and  speculator  lies  in  the  length  of  time  for  which  it 
must  run.  The  farmer  requires  longer  credit  than  the 
banker  is  able  to  give  him,  tmder  existing  conditions. 
As  Ave  have  seen,  the  proposed  remedy,  when  in  effect, 
will  place  a  full  hundred  per  cent  of  public  confidence 
behind  bank  credit,  and  thereby  remove  all  necessity  for 
a  time-limitation.  In  that  case  also  the  amount  a  bank 
could  lend  would  be  limited  only  by  the  amount  of  good 
security  offered  and  not  by  a  silly  reserve  requirement 
as  at  present.  Farmers  would  then  be  on  the  same 
financial  footing  as  merchants,  and  farm  loan  acts  and 
the  like  could  be  consigned  to  the  scrap  pile. 

As  may  well  be  imagined,  the  effects  of  such  a  change 
upon  the  welfare  of  the  nation  would  be  tremendous,  so 
great,  indeed,  as  to  baffle  our  powers  of  description. 

Suffice  it,  then,  to  point  out  one  phase  of  the  benefit 
to  be  gained,  letting  each  individual  see  for  himself 
what  the  total  benefit  would  be. 

As  we  have  seen,  owing  to  the  present  limitations  on 


RURAL  CREDITS  213 

bank  credit,  the  farmer  has  become  a  financial  nuisance 
to  the  banker,  and  a  fit  subject  for  governmental  care. 
This  condition  is  a  detriment  to  agriculture.  It  has 
naturally  caused  people  to  depreciate  the  farming  busi- 
ness. If,  however,  the  agricultural  interests  enjoyed 
the  same  financial  facilities  as  the  manufacturer  and 
speculator — that  is,  if  a  farmer  could  sign  a  note  at  five 
or  six  per  cent  per  annum  for  a  large  share  of  what 
it  cost  him  to  plant  and  harvest  his  crop,  or  rear  his 
stock,  to  be  paid  only  when  the  goods  produced  are  sent 
to  market,  then  he  would  become  a  much  more  contented 
and  respected  citizen.  This  would  be  the  cure  for  "ur- 
banitis."  A  "back  to  the  soil"  movement  would  arise  of 
itself,  and  the  problem  of  congested  centers  of  popula- 
tion would  be  solved. 


CHAPTER  XIV 
THE  FEDERAL  RESERVE 

THE  creation  of  the  Federal  Reserve  System  marked 
a  very  great  improvement  in  our  financial  and  bank- 
ing situation. 

The  fact  is  before  it  was  instituted  it  could  scarcely 
be  said  that  we  had  a  financial  system.  To  be  sure,  we 
had  banks  the  same  as  we  have  now,  but  we  had  no  sys- 
tem, for  each  bank  stood  alone  except  in  so  far  as  banksJ 
co-operated  by  agreement  among  themselves  or  through 
the  clearing  house. 

The  effect  of  such  a  condition  is  best  described  by 
pointing  to  the  fact  that  the  country  had  a  disastrous 
financial  panic  every  ten  years  for  the  eighty  years  pre- 
ceding 1907  with  severe  money  stringencies  in  between 
the  panics.  Besides  the  panics  and  semi-panics  money 
was  always  so  tight  every  harvest  time  that  the  country 
heaved  a  great  sigh  of  relief  when  the  harvest  was  over. 
Any  important  event  such  as  an  election  or  a  large  busi- 
ness failure  was  liable  to  upset  the  whole  credit  structure 
and  cause  a  panic. 

The  Federal  Reserve  Act  has  proved  a  great  relief 
and  it  was  slipped  into  Uncle  Sam's  Christmas  stock- 
ing not  a  day  too  soon.  It  was  approved  on  the 
twenty-third  day  of  December,  1913,  and  turned  out  to 
be  a  valuable  Christmas  present.  Subsequent  events 
suggest  that  the  motto  on  our  coin,  "In  God  we  trust," 

214 


THE  FEDERAL  RESERVE  215 

was  chosen  advisedly,  for  an  all-wise  Providence  must 
have  directed  the  adoption  of  this  act  at  this  particular 
time. 

Not  long  after  its  adoption  came  the  shock  of  war, 
which  would  have  thrown  our  shaky  financial  system  to 
the  ground,  like  a  house  of  cards,  had  it  not  been  for 
the  support  given  it  by  the  new  law.  That  this  support 
was  provided  just  in  time  to  avert  a  great  calamity  proves 
that  our  faith  in  Providence  has  not  been  misplaced. 

Roughly  stated,  the  main  feature  of  this  act  is  that  it 
created  a  central  bank  of  issue  similar  to  that  which 
most  European  countries  have  had  for  many  years.  That 
is  it  created  a  bank  for  the  bankers,  where  banks  be- 
longing to  the  Federal  Reserve  System  keep  their 
reserves  and  where  they  may  discount  or  sell  the  notes, 
etc.,  they  take  for  loans.  In  exchange  for  such  paper  as 
the  Federal  Reserve  will  discount,  it  pays  federal  reserve 
notes  or  federal  reserve  bank  notes. 

The  law  provides  for  a  40%  gold  reserve  behind  fed- 
eral reserve  notes,  but  the  federal  reserve  bank  notes  are 
issued  against  government  obligations  in  about  the  same 
way  national  bank  notes  are  issued.  In  brief,  these  are 
the  features  of  the  system. 

The  value  of  the  act  was  felt  by  the  Comptroller  of 
the  Currency,  who  expresses  what  is  owed  to  the  Federal 
Reserve  System  in  his  report  for  1916.  After  speaking 
of  the  unprecedented  commercial  activities  of  the  pre- 
ceding twelve  months,  he  goes  on  to  say — 

"In  past  years,  under  inadequate  and  unscientific 
banking  and  currency  methods  and  systems,  a  great  in- 
crease in  business  activity  has  almost  invariably  pro- 


216  THE  STRANGLE  HOLD 

duced  a  money  scarcity,  has  occasioned  high  interest 
rates,  and  sometimes  has  precipitated  panics :  but  dur- 
ing the  last  eighteen  months  of  unexampled  prosperity 
we  have  enjoyed,  throughout  the  length  and  breadth 
of  the  land,  the  lowest  money  rates  the  country  has 
ever  seen." 

"No  fair-minded  man  who  has  studied  financial  and 
business  conditions  for  the  past  two  or  three  years 
can  fail  to  see  how  large  a  measure  of  these  deeply 
gratifying  results  are  to  be  credited  to  the  operation 
of  our  Federal  Reserve  System." 

This  statement  is  a  great  tribute  to  the  new  system, 
but  on  closer  inspection  the  words  may  also  be  seen 
to  imply  something  else,  something  that  we  have  been 
steadily  maintaining  all  along. 

To  speak  plainly,  the  Comptroller's  words  mean:  first, 
that  our  privately  administered  financial  system  had 
always  been  an  automatic  brake  on  progress  and  pros- 
perity; second,  that  the  Federal  Reserve  System  gave 
the  private  interests  a  certain  amount  of  control,  so  that 
today  a  period  of  progress  and  prosperity  is  not  nec- 
essarily followed  by  a  financial  panic. 

Even  private  control  is  better  than  no  control  and, 
therefore,  in  so  far  as  the  Federal  Reserve  System  has 
given  the  bankers  a  certain  degree  of  control  it  has 
proved  itself  to  be  a  benefit. 

With  its  assistance,  the  crucial  panic  period  of  1917 
was  weathered  without  a  break-down  in  our  financial 
system,  such  as  had  been  a  decennial  occurrence  since 
1837.  For  this  relief  from  panic  we  must  thank  the  new 
system  but  our  present  state  of  business  collapse  indi- 


THE  FEDERAL  RESERVE  217 

cates  that  the  sore  spot  has  not  yet  been  reached.  The 
improvement  made  lies  in  the  fact  that  our  financiers  have 
learned  a  lesson  in  the  expensive  school  of  experience  in 
which  they  have  been  blindly  working  for  so  long.  The 
lesson  learned  is  the  main  principle  that  has  been  advo- 
cated by  the  writer,  namely,  that  the  only  way  of  fixing 
the  volume  of  the  medium  of  exchange  at  the  proper 
amount  is  to  let  the  demands  of  business  fix  it;  or  in 
other  words,  by  letting  the  productive  activity  of  the 
community  determine  the  amount  of  the  medium  of  ex- 
change in  circulation.  Let  business  control  the  medium 
by  which  it  is  carried  on  instead  of  having  the  medium 
control  business. 

The  system  attempts  to  achieve  this  object  through 
the  federal  reserve  notes,  which  are  issued  against 
commercial  paper — that  is,  notes  arising  out  of  business 
transactions.  As  stated  in  the  title  of  the  act  the  object 
is  to  furnish  an  "elastic  currency." 

While  the  object  sought  was  elasticity  the  act  restricts 
the  expansibility  or  elasticity  of  the  currency  by  limiting 
the  discount  privilege  to  certain  paper — "self-liquidat- 
ing" securities — and  also  by  the  requirement  of  a  40% 
gold  reserve  against  the  federal  reserve  notes. 

This  latter  restriction  clearly  demonstrates  the 
tenacious  hold  which  the  fallacious  gold  standard  pos- 
sesses over  the  human  mind.  Even  in  a  measure  designed 
to  alleviate  the  evils  that  follow  from  it,  it  cannot  be 
shaken  off. 

However,  this  restriction  is  greatly  modified  by  Sec- 
tion 11-C  of  the  Federal  Reserve  Act,  which  gives  the 
Federal   Reserve   Board   power   to   suspend    ALL   RE- 


218  THE  STRANGLE  HOLD 

SERVE  REQUIREMENTS  for  thirty  days  and  renew 

such  suspension   for   fifteen-day   periods   without   limit. 

This  provision  which  follows  permits  an  unlimited  issue 

of  federal  reserve  notes^  "provided  that  it  (the  Board) 

shall  establish  a  graduated  tax  upon  the  amounts  by 

which  the   reserve  requirements  of  this   Act  may   be 

permitted  to  fall  below  the  level  hereinafter  specified," 

and  "provided  further,  that  when  the  gold  reserve  held 

against    federal    reserve    notes    falls    below    40    per 

centum,  the  Federal  Reserve  Board  shall  establish  a 

graduated  tax  of  not  more  than  one  per  centum  per 

annum  upon  such  deficiency  until  the  reserve  fall  to 

S2^  per  centum,  and  when  said  reserve  falls  below 

S^Yz  P^^  centum,  a  tax  at  the  rate  increasingly  of 

not  less  than  1^  per  centum  per  annum  upon  each 

2^  per  centum  or  fraction  thereof  that  such  reserve 

falls  below  32  ^^  per  centum.     The  tax  shall  be  paid 

by  the  reserve  bank,  but  the  reserve  bank  shall  add 

an  amount  equal  to  said  tax  to  the  rates  of  interest  and 

discount  fixed  by  the  Federal  Reserve  Board." 

The   effect   of  this   section   is   to  make   possible   the 

issuing  of   federal  reserve  notes  to   an   amount  limited 

only  by  the  demands  of  business  or  the  action  of  the 

Federal  Reserve  Board. 

The  object  of  the  provision  is  to  do  away  with  the 
limit  fixed  by  gold  on  the  elasticity  of  our  medium  of 
exchange — to  unfetter  it,  so  its  volume  may  expand  to 
meet  the  demands  of  growing  and  progressive  industry. 
This  section,  coupled  with  our  present  business  con- 
dition, confirms  all  that  we  have  been  contending  for,  so 
let  us  examine  it  carefully. 


THE  FEDERAL  RESERVE  219 

The  first  point  to  note  is  that  it  gives  the  Federal 
Reserve  Board  the  power  to  suspend  ALL  RESERVE 
REQUIREMENTS  and  such  suspension  may  be  con- 
tinued indefinitely. 

"Necessity  is  the  Mother  of  Invention,"  and  every 
one  who  has  followed  these  pages  must  see  clearly  v/hat 
was  the  necessity  that  caused  this  provision  to  be  in- 
serted in  this  law. 

The  provision  so  completely  bears  out  our  whole  con- 
tention and  the  present  imsatis factory  business  condi- 
tions make  it  so  clear  that  the  object  of  the  provision 
cannot  be  gained  imtil  the  reform  suggested  herein  is 
carried  out  that  a  few  points  must  be  reviewed. 

Every  expansion  of  business  calls  for  a  corresponding 
expansion  in  the  medium  of  exchange.  If  for  any  reason 
the  medium  cannot  or  does  not  expand  business  hesitates 
and  shakes  confidence;  then  a  slump  follows.  From  the 
beginning  of  the  commercial  era  the  experience  of  trade 
the  world  over  has  been  the  same — slimap  has  always 
followed  prosperity — hard  times  have  followed  good. 
Every  financial  reform  has  sought  to  overcome  this  oft 
repeated  phenomena  but  it  continues  to  the  present 
moment,  as  we  are  only  too  well  aware.  Two  years  ago 
industry  was  brisk,  labor  was  active,  business  was  good 
and  times  were  prosperous;  about  a  year  ago  credit  was 
shut  off  or  "froze  up,"  business  wavered  for  a  few 
months,  and  then  the  slump  started. 

Some  maintained  it  was  due  to  "liquidation,"  others 
said  it  was  a  "buyers'  strike,"  while  everybody  laid  it  to 
the  "H.  C.  L."  and  now  we  are  promised  good  times  as 
soon  as  we  return  to  "normalcy."     But  the  trouble  with 


220  THE  STRANGLE  HOLD 

"normalcy"  is  that  a  condition  of  slump  or  hard  times 
is  just  as  much  or  a  little  more  our  normal  condition 
than  prosperity  and  good  times. 

It  has  been  fully  explained  how  this  condition  is 
brought  about  because  credit  is  limited  to  a  promise  to 
pay  a  certain  commodity,  gold,  which  makes  a  reserve 
limit  necessary.  This  folly  and  deception  is  exposed  in 
the  following  chapter  although  it  is  fully  explained  in 
Chapter  V  and  the  method  by  which  it  may  be  overcome 
is  given  in  Chapters  VII  and  VIII. 

The  present  slump  makes  it  most  certain  that  this  pro- 
vision in  the  Federal  Reserve  Act  which  was  intended  to 
overcome  the  phenomena  of  slump  following  prosperity 
has  not  accomplished  its  object. 

A  little  reflection  will  show  the  reasons.  We  still  have 
the  false  promise  of  gold  redemption  as  a  basis  for  credit 
and  its  use  is  privately  controlled.  Until  these  defects 
are  removed  the  phenomena  will  continue. 

This  provision  is  a  wise  one  and  aimed  in  the  right 
direction,  for  it  is  an  attempt  to  overcome  the  limit  fixed 
by  the  gold  standard.  It  shows  that  part  of  the  lesson 
has  been  learned.  But  while  aimed  in  the  right  direc- 
tion, it  is  not  aimed  at  the  real  cause  of  the  trouble 
— private  control.  However,  it  shows  clearly  that  finan- 
cial reform  is  tending  in  the  direction  we  wish  it  to  go 
and  the  suggestion  in  Chapter  VIII,  of  thirty  words  to 
be  inserted  in  the  Federal  Reserve  Act,  which  will  over- 
come all  the  trouble,  is  but  one  short  step  in  advance. 

This  provision  in  the  act  had  to  fight  against  a  strong 
national  prejudice  which  had  been  handed  down  from  the 
beginning  of  our  government.    The  provision,  in  permit- 


THE  FEDERAL  RESERVE  221 

ting  an  unlimited  paper  currency,  as  it  does,  had  to  en- 
counter a  long-continued  and  deep-seated  enmity  against 
precisely  this  one  thing — an  unlimited  paper  currency. 

We  should  also  note  that  the  Federal  Reserve  Act 
overcame  another  national  prejudice,  as  deep-seated  and 
as  long-continued  as  that  against  an  unlimited  paper  cur- 
rency. That  was  the  prejudice  against  a  central  bank 
exercising  some  measure  of  uniform  control  over  its 
many,  diverse  and  scattered  branch  banks — a  prejudice 
which  has  existed  ever  since  the  downfall  of  the  Second 
United  States  Bank. 

This  prejudice  may  not  be  overcome  but  it  has  been 
sidetracked  by  the  Federal  Reserve  System.  This  was 
accomplished  by  side-stepping  and  the  juggling  of  terms 
in  this  way.  Since  the  country  was  opposed  to  a  central 
bank,  twelve  regional  districts,  with  a  Federal  Reserve 
Bank  and  a  board  of  directors  in  each  district,  were  cre- 
ated. Then  all  were  put  under  the  control  of  the  Federal 
Reserve  Board  in  Washington.  In  this  way  a  uniform 
control  is  exercised  over  the  different  banks  just  as  if 
they  were  branches  of  one  central  bank. 

In  effect,  then,  and  in  order  to  circumvent  a  popular 
prejudice,  the  act  did  not  establish  a  central  bank  with 
a  branch  in  each  district,  as  in  Europe,  but  instead  es- 
tablished the  branch  banks,  and  then  consolidated  them 
under  one  supreme  management.  Except  for  this  distinc- 
tion, which  is  really  no  difference,  the  Federal  Reserve 
System  is  a  reproduction  of  the  European  central  bank 
idea.  It  very  closely  approaches  the  German  Reichsbank 
in  structure,  method  of  management,  and  operation. 

To  the  Federal  Reserve  System,  then,  we  owe  the  fact 


222  THE  STRANGLE  HOLD 

that  our  country  has  been  able  to  pass  through  a  period 
of  great  stress  without  recurrence  of  the  formerly  in- 
evitable phenomena  of  bank  runs  and  financial  panic. 
These  evils  the  Federal  Reserve  System  has,  at  least  so 
far,  checked,  and  to  this  extent  it  has  been  a  benefit. 

Tight  money  and  panics,  however,  are  only  the  symp- 
toms of  a  deep-seated  trouble,  and  the  system  cannot  be 
rectified  until  the  underlying  flaw  has  been  removed.  This 
flaw  has  not  been  removed,  for  the  Federal  Reserve  Sys- 
tem has  not  broken  the  strangle-hold  of  our  bankers 
upon  the  prosperity  and  business  life  of  the  commTmit3\ 
So  far  from  removing  the  private  control  of  our  bank- 
ers over  our  medium  of  exchange,  the  Federal  Reserve 
System  tends  rather  to  strengthen  it.  This  private  con- 
trol, the  real  trouble  maker,  like  the  mosquito  which  car- 
ries the  yellow  fever  germ,  is  relatively  insignificant  in 
comparison  with  its  bad  effects,  which  no  doubt  ex- 
plains why  it  has  evaded  detection  so  long  and  why  it 
was  left  untouched  by  the  Federal  Reserve  Act. 

Instead  of  securing  100%  confidence  by  public  con- 
trol of  bank  credit,  the  Federal  Reserve  System  seeks 
to  gain  confidence  for  our  medium  of  exchange  by  put- 
ting the  nation's  credit  at  the  disposal  of  the  banks. 
This  arrangement  has  to  a  degree  allayed  the  bad  symp- 
toms of  bank-runs  and  panics. 

The  nation's  credit  is  loaned  to  the  bankers  by  pro- 
viding a  discount  market  for  the  paper  the  banker  buys 
with  his  credit.  That  is,  it  established  "shops"  (the 
regional  bank)  where  banks  belonging  to  the  system  may 
exchange  the  notes  they  have  taken  from  their  custom- 
ers for  federal  reserve  notes,  which  are  guaranteed  by 


THE  FEDERAL  RESERVE  223 

the  government.  This  arrangement  has  greatly  strength- 
ened the  position  of  the  banker  and  reduced  the  hazard 
of  loss  of  public  confidence.  Through  the  regional  banks 
all  the  discountable  paper  in  a  member  bank's  possession 
can  be  turned  into  government  paper  any  time  its  depos- 
itors want  money.  Assuredly  such  an  arrangement 
strengthens  public  confidence  in  the  banks,  for  it  prac- 
tically gives  to  each  member  bank  a  master  key  to  the 
national  treasury. 

Putting  the  nation's  credit  at  the  disposal  of  the  bank- 
ers has,  of  course,  increased  their  lending  power  and  to 
that  extent  the  system  has  improved  the  elasticity  of  our 
exchange  medium. 

That  we  have  improved  our  financial  system  by  estab- 
lishing the  Federal  Reserve  Bank  cannot  be  denied  for 
we  have  increased  the  two  elements,  safety  and  elasticity 
and  on  them  depends  the  efficiency  of  any  medium  of 
exchange.  But,  would  not  these  two  vital  elements, 
safety  and  elasticity,  be  enhanced  still  further  by  public 
control  of  bank  credit? 

If  the  people  knew  that  every  loan  every  bank  made 
was  based  on  security  approved  by  themselves  they  would 
have  one  hundred  percent  confidence  in  bank  credit.  In 
that  case  all  bank  credit  would  be  perfectly  safe  and 
any  or  all  of  it  could  be  exchanged  for  federal  reserve 
notes  whenever  desired. 

Under  public  control  the  amount  of  bank  credit  would 
be  limited  only  by  the  amount  of  good  security  offered 
and  as  equal  facility  would  be  enjoyed  by  all,  our  medium 
of  exchange  would  then  be  one  hundred  percent  clastic. 

So  public  control,  by  giving;  perfect  safety  and  per- 


224  THE  STRANGLE  HOLD 

feet  elasticity,  would  accomplish  what  the  Federal  Re- 
serve Act  tries  to  accomplish. 

As  long  as  bank  loans  are  left  to  the  unrestricted  will 
of  the  bankers  the  little  gain  in  safety  and  elasticity 
secured  by  means  of  the  Federal  Reserve  Act  are  at  alto- 
gether too  great  a  cost  in  personal  liberty  and  national 
efBciency. 

To  give  up  our  American  principles  of  liberty  and 
equality  for  any  degree  of  financial  stability  is  too  much 
like  asking  the  wolf  to  accept  the  house  dog's  collar  in 
order  that  he  may  be  well  fed. 

A  remedy  that  aims  to  improve  our  financial  system  at 
the  cost  of  our  principles  may  be  suffered  as  a  pallia- 
tive, but  only  pending  the  operation  necessary  for  a 
cure. 

While  admitting  that  it  has  greatly  improved  our 
financial  system,  the  Federal  Reserve  Act  does  not  reach 
the  fundamental  evil.  On  the  contrary,  it  only  tends  to 
cover  up  the  flaw,  private  control,  by  giving  it  the  ap- 
pearance of  public  control.  The  impression  of  public 
control  is  created  through  the  federal  reserve  notes 
being  printed  by  the  government  but  they  are  issued  only 
when  and  as  called  for  by  the  banker. 

Instead  of  breaking  the  hold  of  private  interests  on 
the  commercial  life  of  the  nation  we  see  that  the  amoimt 
of  federal  reserve  notes  in  circulation  depends  entirely 
upon  the  amount  of  paper  the  private  banks  choose  to 
discount.  To  insure  justice  and  an  equal  opportunity 
for  all  and  to  promote  efficiency  and  prosperity  the  cir- 
culating medium  should  be  regulated  entirely  by  the 
business  activity  of  the  whole  commiinity. 


THE  FEDERAL  RESERVE  225 

To  the  extent  that  the  P'ederal  Reserve  supplies  an 
elastic  currency  through  privately  owned  and  controlled 
banks  it  is  good,  but  it  serves  only  those  interests  which 
have  access  to  these  private  banks.  It  does  not,  in  its 
present  form,  nationalize  our  medium  of  exchange  as  it 
should  and  could  be  made  to  do,  nor  does  it  remove  the 
stranglehold  of  private  interests  from  the  throat  of  in- 
dustry. 

The  title  of  the  Federal  Reserve  Act  recites  that  the 
primary  purpose  of  the  act  is  "to  furnish  an  elastic  cur- 
rency, to  afford  means  of  rediscounting  commercial 
paper,"  etc.  The  only  means  by  which  the  act  furnishes 
an  elastic  currency  are:  First,  by  reducing  the  legal 
reserves  required  to  be  held  by  member  banks,  thus 
allowing  them  to  issue  a  larger  amount  of  bank  credit  on 
the  reserve;  and,  second,  by  allowing  the  member  banks 
to  take  private  obligations  (acceptances  and  commercial 
paper)  purchased  with  their  credit  to  the  Federal  Re- 
serve Bank  and  exchange  this  private  paper  for  govern- 
ment obligations  in  the  form  of  federal  reserve  notes. 

This  crystallization  of  bank  credit  into  government 
money  adds  greatly  to  the  stability  and  value  of  bank 
credit  and  dignifies  it  by  the  name  of  currency.  The 
added  amount  of  bank  credit  put  into  circulation  by  the 
reduction  of  legal  reserve  requirements  and  the  increased 
credit  that  banks  are  encouraged  to  issue  through  dis- 
counting private  paper  for  federal  reserve  notes,  con- 
stitutes the  "elastic  currency"  furnished  under  the  Act. 

The  accepted  meaning  of  the  term  "currency"  is  gov- 
ernment-issued paper  money,  and  in  this  sense  the  fed- 
eral reserve  notes  are  "currency,"  since  they  are  issued 


226  THE  STRANGLE  HOLD 

by  a  Federal  institution  (the  Federal  Reserve  Board) 
and  they  are  obligations  of  the  government.  Yet  the 
word  "currency"  is  essentially  misleading  when  applied 
to  these  notes.  A  careful  examination  of  the  modus 
operandi  of  their  issuance  shows  that  they  are  put  into 
circulation  only  on  the  action  of  the  banker  and  not  at 
the  will  of  the  government.  The  government  institution 
which  issues  them  operates  only  when  the  banker  turns 
the  crank  because  they  are  issued  only  in  exchange  for 
paper  which  the  banker  has  taken  by  making  a  loan  of 
his  credit. 

The  point  is  this,  and  it  should  be  perfectly  under- 
stood: federal  reserve  notes  are  called  forth  only  in 
exchange  for  commercial  paper  purchased  by  the  banker 
with  bank  credit.  It  is  done  in  this  way:  Jones  wants 
to  borrow  money.  He  goes  to  the  bank  where  he  is  known 
and  applies  for  a  loan.  If  the  bank's  finance  committee 
(our  "money  trust")  passes  the  loan  Jones  puts  up  his 
note  and  securities  and  receives  credit  (bank  credit)  on 
his  pass  book  for  the  amount  borrowed.  Now  let  us  sup- 
pose Jones  and  others  draw  on  the  bank  to  the  extent 
that  the  banker  needs  money.  In  that  case  the  banker 
simply  takes  Jones'  note  to  a  Federal  Reserve  regional 
bank  and  exchanges  it  for  its  discount  value  in  federal 
reserve  notes.  This  privilege  of  trading  private  paper 
for  government  money  is  extended  only  to  "member 
banks."  Since  this  currency  is  issued  only  in  exchange 
for  paper  presented  by  these  banks,  we  have  in  effect 
turned  the  United  States  mint  over  to  the  bankers. 

How  completely  the  mint  has  been  turned  over  to  the 
banking  interests  may  be  judged  by  the  percentage  which 


THE  FEDERAL  RESERVE  227 

these  notes  and  national  bank  notes  bear  to  all  the  cur- 
rency in  circulation. 

Before  the  days  of  the  Federal  Reserve  we  had  in 
circulation,  besides  the  national  bank  notes,  greenbacks 
and  gold  and  silver  certificates.  The  bank  notes,  as  their 
name  implies,  were  and  are  "bank  money"  issued  by  the 
national  banks  and  we  have  seen  that  the  federal  re- 
serve notes  are  also  bank  money,  but  the  others  were 
and  occasionally  are  now  issued  by  the  government  and 
may  be  referred  to  as  the  "people's  money." 

Now  in  order  to  ascertain  to  what  extent  the  banks 
have  encroached  on  this  most  important  function  of 
issuing  money,  that  is,  to  what  extent  the  bankers  have 
taken  charge  of  our  mint — ^just  take  note  of  the  money 
that  comes  into  your  possession  and  see  what  per- 
centage of  the  whole  is  made  up  of  gold  coin,  gold  and 
silver  certificates  or  greenbacks  of  large  denomination 
and  what  percentage  consists  of  national  bank  notes, 
federal  reserve  notes  or  federal  reserve  bank  notes. 
If  silver  coin  and  the  lesser  coins  are  excluded  from  this 
calculation,  for  the  reason  that  there  are  no  bank  issues 
to  take  their  place  in  making  change,  you  will  find  that 
the  "people's  money"  is  practically  unrepresented.  "Bank 
money"  has  so  nearly  displaced  the  use  of  government 
money  that  gold  coin,  gold  and  silver  certificates  and 
greenbacks  of  large  denominations  are  now  curiosities. 

No  question  is  raised  as  to  the  safety  of  these  fed- 
eral reserve  notes.  They  are  good,  safe  money,  for  not 
only  do  they  have  private  credit  for  their  full  face  value 
behind  them,  but  they  are  government  obligations  and 
are,  therefore,  as  safe  as  government  bonds. 


228  THE  STRANGLE  HOLD 

The  real  effect  of  the  Federal  Reserve  System  is  to 
strengthen  the  position  of  the  bankers.  It  does  not  in 
the  least  tend  to  remove  the  vital  defect  in  our  financial 
system.  Federal  reserve  notes  are  a  crystallization  of 
bank  credit,  in  vfhich  the  security  of  the  government  iy 
added  to  the  security  of  the  banks.  These  notes  are  a 
safe  medium;  but  the  bankers  are  in  control  of  their 
issuance.  The  Federal  Reserve  Banks  do  not  deal  vs^ith 
the  people.  They  are  bankers'  banks  only.  The  privilege 
of  turning  credit  into  our  national  currency  is,  therefore^ 
still  in  the  hands  of  the  few  private  citizens  who  control 
the  banks. 

The  Constitution  reserves  to  the  Federal  Government 
the  right  to  coin  money.  In  order  that  all  may  share 
equally  so  important  a  privilege,  gold  is  given  the  right 
of  FREE  coinage.  Any  one  possessing  gold  bullion  may 
take  it  to  the  United  States  mint  and  receive  its  full 
value  in  coined  money.  The  gold  coinage  law  is  general 
in  application,  and  confers  the  right  equally  upon  all. 
If  a  law  attempted  to  say  that  only  a  few,  or  only  a  cer- 
tain class,  had  this  particular  privilege,  it  would  be 
condemned  as  class  legislation  and  as  being  imdemo- 
cratic,  for  under  our  declared  principles,  all  men  should 
be  equal  before  the  law. 

Since  bank  credit  has  almost  entirely  replaced  gold  as 
our  medium  of  exchange,  it  should  be  issued  under  the 
same  conditions  as  apply  to  the  coinage  of  gold.  The 
freedom  from  special  privilege,  which  accompanies  the 
coinage  of  gold,  should  be  applied  also  to  the  minting  of 
credit.  Value,  in  all  its  concrete  forms,  is  the  real  se- 
curity behind  bank  credit  and  all  who  bring  value  to  the 


THE  FEDERAL  RESERVE  229 

bank  should,  therefore,  be  privileged  to  receive  the  same 
percentage  of  the  medium  of  exchange  thereon. 

But  how  completely  this  principle  is  ignored!  In  the 
federal  reserve  notes  we  have  a  crystallized  form  of 
bank  credit,  constituting  a  major  part  of  our  circulating 
medium.  Yet  these  notes  are  issued  entirely  at  the  will 
and  discretion  of  various  groups  of  private  citizens,  the 
finance  committees  of  banks,  wholly  without  regard  to 
individual  rights,  constitutional  provisions,  or  to  the  dem- 
ocratic principle  that  government  must  be  administered 
impartially. 

What  an  outcry  would  be  raised  were  the  government 
to  mint  gold  bullion  into  coin  for  a  certain  class  only. 
But  compare  the  number  of  persons  who  have  gold  bul- 
lion to  exchange  for  coin  at  the  public  mint  with  the 
number  who  go  to  the  private  mint,  to  wit,  the  bank, 
to  have  their  securities  coined  into  bank  credit,  through 
a  loan  which  may  subsequently  be  coined  into  federal 
reserve  notes  by  the  banker. 

In  this  private  mint,  which  is  far  more  important  than 
the  public  mint,  privilege  exists  to  the  highest  degree. 
And  besides  this  fact  the  arbiters  of  our  fate  are  re- 
sponsible to  no  one,  not  even  to  their  own  consciences. 
For  in  all  probability  they  do  not  themselves  realize  the 
far-reaching  eifects  of  the  autocratic  power  they  wield. 

The  effect  of  the  Federal  Reserve  Act  is  that  it  in- 
tensifies the  grip  which  the  bankers  have  upon  our  whole 
industrial  system.  By  placing  the  strength  of  the 
national  government  behind  bank  credit,  through  the 
issue  of  federal  reserve  notes,  without  taking  out  of  the 
bankers'  hands  the  control  over  the  issuing  of  that  credit. 


230  THE  STRANGLE  HOLD 

the  Federal  Reserve  Act  confers  upon  our  bankers  a 
privilege  that  is  vastly  more  important  than  the  right  to 
the  free  coinage  of  gold.  Consciously  or  unconsciously, 
it  undermines  the  principle  upon  which  our  government 
was  founded,  the  principle  of  equality  before  the  law. 
Unless  this  principle  is  upheld,  no  democracy  can  pos- 
sibly endure. 

At  once  the  matter  becomes  not  merely  a  financial 
problem,  nor  a  mere  question  of  banking  or  business 
methods,  it  reaches  to  the  very  bedrock  of  our  social 
institutions,  and  its  importance  is  commensurate  with 
its  depth. 

The  Federal  Reserve  System,  then,  is  at  best  no  cure,, 
it  is  a  sedative,  nothing  more.  It  has  soothed  the  bank- 
er's fears,  and  injected  some  confidence  into  the  public 
mind,  thus  enabling  us  to  pass  through  a  very  trying 
period  in  our  history.  But  like  all  sedatives,  it  has  a 
bad  result.  Its  narcotic  effect  renders  more  difficult  the 
location  of  the  cause  of  our  social  ills — for  it  lulls  us 
into  the  belief  that  the  disease  has  been  cured. 

Because  our  usual  decennial  panic  did  not  occur,  and 
our  chronic  state  of  money  stringency  has  been  some- 
what relieved,  the  belief  is  common  that  our  financial 
evils  have  been  cured ;  while  the  truth  is  that  the  cause  of 
these  unfavorable  financial  manifestations,  and  of  most 
of  our  political,  industrial  and  social  ills,  remains  un- 
touched. 

And,  what  is  even  worse,  the  system  attempts  to  cure 
our  financial  ills  by  increasing  the  real  defect  in  our 
social  system.  Under  this  act  the  private  control  of  our 
medium  of  exchange  is  given  a  firmer  grasp  upon  the 


THE  FEDERAL  RESERVE  231 

nation.  The  Act  has  rendered  the  money  power  more 
dangerous  to  our  personal  liberty,  and  gives  it  greater 
opportunity  to  encroach  upon  our  national  democracy. 

While  the  Federal  Reserve  Act  has  fallen  far  short 
of  its  purpose,  it  has  performed  a  service  and  it  has 
within  itself  a  latent  power  for  good.  For  although  the 
act  is  not  a  cure  in  its  present  form,  it  furnishes  a  most 
convenient  and  readily  adaptable  instrument  through 
which  a  real  cure  may  be  administered. 

The  act  should  be  amended  by  striking  from  the  title 
the  word  "Reserve,"  making  it  read,  "The  Federal  Bank 
Act,"  then  the  body  of  the  act  should  be  amended  to 
conform  to  that  title.  With  the  addition  of  a  few 
words  to  put  into  effect  the  suggestions  made  in  Chapter 
VIII,  the  flaw  not  only  in  our  financial  system,  but  in 
our  social  system,  would  be  removed.  A  simple  change 
indeed  and  one  that  could  be  easily  made  to  the  benefit 
of  all  and  with  no  disturbance  to  business. 


CHAPTER  XV 

THE   CONSERVATIVE  BANKER  AND  HIS 
RESERVE  JOKE 

THE  banker  is  an  extremely  conservative  person.  He 
clings  closely  to  the  status  quo  and  is  fearful  of 
all  changes,  regardless  of  the  reasons  which  may 
prompt  them.  This  attitude  on  his  part  is  exactly  what 
might  be  expected,  for  the  banker  enjoys  such  a  secure 
and  powerful  position  under  existing  conditions  that  any 
change  seems  likely  to  him  to  result  in  a  lessening  of  his 
power,  consequently  he  will  oppose  all  changes  on  prin- 
ciple. 

The  banking  interests  strenuously  opposed  the  adop- 
tion of  the  Federal  Reserve  Act,  just  as  they  have  op- 
posed many  other  pieces  of  constructive  legislation.  Op- 
position to  change  is  the  natural  attitude  of  all  bankers, 
but  in  the  particular  case  of  the  Federal  Reserve  Act,  this 
opposition  was  due  not  only  to  a  general  aversity  on  the 
part  of  the  banker  to  any  change,  but  also  to  another 
reason,  a  reason  far  stronger,  and  one  which  resulted 
in  the  bitter  and  united  opposition  of  practically  all  the 
bankers  in  the  country. 

This  reason  was  the  original  proposal  to  make  the  Fed- 
eral Reserve  Bank  a  people's  bank,  where  borrowers 
could  go  directly  for  credit  when  private  banks  refused 
to  accommodate  them.  The  origin  of  this  suggestion  lay 
in  the  startling  revelations  of  what  was  known  as  the 

232 


THE  CONSERVATIVE  BANKER  233 

Pujo  committee,  "which  made  a  congressional  investiga- 
tion of  the  "money  trust." 

The  testimony  given  before  this  committee  disclosed 
the  vast  power  wielded  by  a  few  rich  men.  It  also 
showed  up  the  black  hand  financial  methods  used  by 
what  we  commonly  call  "Wall  Street."  Together  the  dis- 
closures shocked  the  country.  The  result  was  a  sugges- 
tion to  establish  a  Federal  Bank  open  to  the  use  of  the 
people  directly. 

But  the  mere  suggestion  caused  such  a  cry  of  fear  and 
such  a  frantic  prediction  of  calamity  from  the  bankers 
that  it  sent  a  cold  chill  down  the  spine  of  every  business 
man. 

One  can  well  imagine  the  light  in  which  the  bankers 
regarded  such  a  proposal.  The  whole  subject  of  finance 
had  always  been  shrouded  in  such  a  veil  of  mystery  and 
the  system  had  permitted  the  bankers  to  command  hom- 
age and  compel  tribute  from  all  for  so  long  a  time,  that 
the  granting  or  denial  of  credit  had  come  to  be  looked 
upon  by  them  as  a  vested  right.  Naturally  any  sug- 
gestion which  had  as  its  object  the  curtailment  of  this 
right  would  meet  with  strong  opposition.  To  permit 
the  people  to  use  their  own  credit  without  the  permission 
of  the  bankers  and  without  paying  tribute  to  them 
seemed  to  them  to  be  an  invasion  of  their  rights.  The 
idea  of  a  people's  bank  for  this  reason,  aroused  them 
and  the  result  of  their  opposition  is  interesting. 

Natural  history  informs  us  that  the  octopus,  some- 
times referred  to  as  the  devil  fish,  has  in  its  anatomy  an 
ink  sack  from  which  it  can,  when  attacked,  emit  a  black 
fluid  that  will  confound  an  enemy  and  cover  its  escape. 


234  THE  STRANGLE  HOLD 

This  characteristic  seems  to  be  common  to  the  species, 
whether  of  the  order  "dibranchiate"  or  "financial."  For 
by  their  clamorous  opposition  to  the  proj^osition  of  a 
people's  bank^  the  banking  interests  succeeded  in  having 
the  act  recast.  And  it  was  cleverly  recast,  too,  by  the 
adroit  hand  of  Wall  Street,  so  that  in  its  present  form 
the  people's  bank  idea  was  entirely  wiped  out,  and 
every  provision  was  turned  to  the  banker's  benefit. 

And  like  the  octopus,  those  who  had  it  recast  were 
clever  to  cover  the  effect  of  their  operations  with  an 
impenetrable  haze  of  financial  fiction.  The  effect  of  the 
act  in  its  new  and  present  form  was  and  still  is  generally 
misunderstood.  Not  only  is  this  true  of  the  average  lay- 
men, but  also  of  many  of  the  bankers.  For,  after  the  act 
had  been  changed  so  that  the  last  vestige  of  a  people's 
bank  was  removed,  the  opposition  to  it  among  the  bank- 
ers remained.  In  fact  their  opposition  was  so  strong 
that  only  the  great  impetus  of  popular  pressure  for 
some  kind  of  relief,  backed  by  the  firm  will  of  a  deluded 
President,  forced  the  adoption  of  this  law,  emasculated 
as  it  was. 

The  opposition  of  the  great  majority  of  the  bankers, 
inspired  by  their  natural  conservativeness,  wr.s  no  doubt 
genuine.  But  when  the  features  of  this  act  are  really  un- 
derstood, one  cannot  believe  that  the  apparent  opposition 
of  the  big  interests  was  ever  intended  as  anything  more 
than  a  counter-irritant,  with  the  object  of  making  the 
people  adopt  the  law. 

Few  laymen,  and  not  even  our  law  makers  have 
given  sufficient  heed  to  the  ultimate  effect  of  this  act. 
Those  who  uphold  it  do  not  see  that  under  its  veneer 


THE  CONSERVATIVE  BANKER  235 

•of  public  good  it  gives  the  big  financial  interests  a 
firmer  grip  than  ever  upon  the  business  life  of  the  na- 
tion. They  have  not  noted  that  the  act  has  put  into  the 
hands  of  these  interests  full  control  of  the  circulating 
medium.  And  so  they  fail  to  realize  that  the  real  effect 
of  the  Federal  Reserve  Act  has  been  to  give  control  of 
the  medium,  which  is  necessary  to  every  industry  and 
to  every  person,  so  completely  into  the  keeping  of  a  few 
that  their  power  over  the  nation  industrially,  socially, 
and  politically  is  practically  complete.  No  political 
ruler  ever  wielded  such  an  autocratic  power. 

This  charge  is  a  severe  arraignment  of  a  law  pop- 
ularly supposed  to  free  the  people  from  the  strangle- 
hold of  the  money  power.  Facts  and  logic,  however, 
make  this  charge.  It  is  the  only  conclusion  possible  when 
the  situation  is  understood.  No  other  conclusion  is  ten- 
able as  can  be  seen  from  the  exposition  of  the  true  nature 
of  the  act,  given  in  the  last  chapter.  We  saw  in  Chapter 
XI  that  a  former  Secretary  of  the  Treasury  considered 
it  necessary  to  deceive  the  people  in  order  to  cover  the 
weakness  of  our  financial  system.  The  super  financiers 
who  shaped  the  Federal  Reserve  Act  into  its  present 
form  followed  this  suggestion  most  effectively  and  with 
surprising  results. 

The  main  points  in  the  law  have  been  explained.  No 
object  could  be  gained  by  following  its  intricate  de- 
tails and  it  would  be  unwise  to  attempt  to  do  so  here. 
The  explanation  of  one  means  by  which  the  act  has  been 
made  to  serve  the  banking  interests  will  be  apparent  and 
will  suffice.  This  is  the  way  in  which  the  greenback,  at 
one  time  a  very  much  despised  and  a  very  much  opposed 


236  THE  STRANGLE  HOLD 

type  of  national  currency,  has  become  highly  appreciated 
by  and  very  lucrative  for  the  banker. 

The  greenback.  United  States  note,  or  legal  tender 
note  was  an  unsecured  promise  to  pay,  first  issued  dur- 
ing the  Civil  War.  It  certainly  was  an  ugly  duckling 
though  it  afforded  a  great  refuge  during  the  stress  of 
those  times.  By  giving  these  notes  full  legal  tender 
power,  the  government  gave  them  all  the  force  that  a 
government  can  put  behind  an  unsecured  paper  currency. 
However,  for  nearly  twenty  years,  starting  with  their 
first  appearance,  an  unrelenting  attack  both  as  to  the 
validity  and  value  of  these  notes  was  led  by  the  banking 
interests.  At  one  time  these  attacks  drove  their  value 
down  to  less  than  forty  cents  on  the  dollar.  The  strife 
continued  until  the  bankers  finally  had  the  matter  ar- 
ranged to  their  satisfaction.  Greenbacks  became  avail- 
able for  reserve.    They  were  "lawful  money." 

By  means  of  the  Federal  Reserve  Act,  the  banker  suc- 
ceeded in  turning  this  "people's  money,"  as  the  green- 
back was  called  by  its  advocates,  into  a  most  valuable 
"banker's  money,"  and  the  way  in  which  this  feat  was 
accomplished  was  as  follows: 

The  Federal  Reserve  Act  provides  that  the  reserve  of 
35%,  which  all  Federal  Reserve  Banks  must  hold  against 
deposits,  can  be  held  in  either  gold  or  "lawful  money." 
Greenbacks  are  lawful  money.  By  means  of  this  sim- 
ple arrangement  a  miracle  was  wrought.  Through  this 
arrangement,  which  permits  Federal  Reserve  Banks  to 
carry  their  reserve  against  deposits  in  greenbacks,  this 
despised  paper  currency  became  as  valuable  as  gold. 

To  judge  the  effect  of  this  miracle  let  us  take,  as  an 


THE  CONSERVATIVE  BANKER  237 

example,  a  little  jim  crow  bank  in  a  country  village, 
with  a  capital  of  $25,000  distributed  as  follows:  $10,000 
invested  in  building  and  fixtures;  $1,500  in  gold  invested 
in  Federal  Reserve  Bank  stock,  purchased  under  com- 
pulsion, on  which  the  bank  receives  6%  cumulative  divi- 
dends; and  $13,150,  in  other  securities.  The  bank  has 
then  left  out  of  its  capital  $350,  let  us  say  this  is  in 
greenbacks. 

The  bank  has  no  deposits  as  yet,  but  as  it  is  com- 
pelled by  law  to  maintain  a  reserve  equal  to  7%  of  its 
demand  deposits  and  3%  of  its  time  deposits  with  the 
Federal  Reserve  Bank  of  its  district,  it  prepares  for 
business  by  sending  the  $350  in  greenbacks  to  the  Fed- 
eral Reserve  Bank  as  a  deposit.  That  leaves  the  till  of 
our  little  bank  as  clean  as  old  Mother  Hubbard's  cup- 
board ;  but  the  customer  is  not  going  to  fare  as  poorly  as 
the  dog  did,  even  if  the  till  is  bare  and  the  customer 
happens  to  be  a  borrower. 

It  is  easy  to  see  how  a  bank  with  no  money  on  hand 
can  accommodate  a  depositor,  but  just  how  is  this  bank 
going  to  satisfy  the  borrower  out  of  an  empty  till? 

This  feat  is  easy  when  you  know  how.  Listen !  Here 
comes  the  borrower  with  that  humility  and  deference 
with  which  the  borrower  always  approaches  the  banker 
and,  by  means  of  an  eloquent  appeal  in  which  he  tells 
the  banker  just  how  he  is  going  to  use  the  money,  he 
finally  succeeds  in  breaking  through  the  million  dollars' 
worth  of  dignity  with  which  the  banker  surrounds  his 
empty  till.  So  he  secures  a  loan  of  $1,000  for  90  days. 
The  banker  takes  the  borrower's  note  and  securities  and 
hands  him  in  exchange  a  pass  book  with  the  date  and 


238  THE  STRANGLE  HOLD 

$1,000  written  on  the  credit  side.  For  the  purpose  of 
turning  that  daub  of  ink  into  money,  he  very  graciously 
gives  him  a  check  book. 

It  usually  thrills  one  with  a  sense  of  importance  to 
be  handed  a  nice  new  check  book  by  the  banker. 

The  borrower  now  has  one  thousand  dollars'  worth  of 
the  medium  of  exchange,  bank  credit,  with  which  to  do 
business,  and  the  banker  has  one  thousand  dollars  in 
personal  credit,  a  note,  at,  say,  eight  per  cent  interest 
backed  by  good  security.  The  question  now  arises,  how 
are  the  checks  which  the  borrower  will  draw  going  to  be 
paid.**  The  bank  till  being  empty,  one  naturally  won- 
ders where  the  money  is  to  come  from.  At  first  sight 
this  seems  to  be  rather  a  complicated  problem,  but  when 
one  imderstands  the  tricks  of  banking  it  becomes  very 
simple. 

Without  loss  of  time  the  banker  takes  that  $1,000 
note  to  the  Federal  Reserve  and  discounts  it  at  6%. 
He  draws  out  only  $350  in  federal  reserve  notes,  thereby 
increasing  his  deposit  of  $350  already  made  with  the 
greenbacks  by  $650,  which  gives  him  a  credit  of  $1,000 
as  a  reserve.  So  he  goes  merrily  on  receiving  deposits 
and  making  loans. 

Deposits  of  cash  will  probably  equal  or  exceed  with- 
drawals, so  the  $350  in  federal  reserve  notes  which  he 
has  taken  out  of  the  $1,000  note  will  give  the  banker 
ample  cash  funds  for  paying  checks. 

Let  us  follow  this  operation  in  frenzied  finance  and 
figure  the  yearly  profit  made  possible  for  the  banker 
through  the  proper  use  of  a  few  greenbacks  which  his 
predecessor  so  despised. 


THE  CONSERVATIVE  BANKER  239 

On  the  note  discounted,  the  banker  profits  by  the 
difference  between  the  8%  the  note  bears  and  the  6% 
for  which  it  was  discounted,  or  2%  on  $1,000  which  for 
one  year  would  be  $20.  As  this  bank  is  required  to 
carry  a  deposit  in  the  Federal  Reserve  Bank  equal  to 
only  7%  of  its  own  deposits,  and  as  it  now  has  de- 
posited there  $1,000  it  can  carry  deposits  up  to 
$14,285.71,  for  $1,000  is  7%  of  that  amount.  It  can, 
therefore,  create  this  amount  of  deposits  by  making 
$13,285.71  additional  loans  on  which  it  will  collect  8% 
or  $1,062.85,  which  added  to  the  $20.00  made  on  the 
note  for  $1,000  which  is  kept  discounted  makes  $1,082.85 
in  all. 

This  income  on  each  $1,000  of  deposit  with  the  Fed- 
eral Reserve  is  not  so  bad  a  piece  of  business  when 
one  considers  that  the  bank  has  not  one  cent  invested. 
Its  whole  capital  stock  was  put  into  income  property 
or  securities  except  the  $350  in  greenbacks,  which  were 
traded  for  federal  reserve  notes  by  discounting  a  pri- 
vate note.  These  notes  are  held  by  our  little  bank  as 
CASH  while  the  $350  in  greenbacks  are  held  by  the 
Federal  Reserve  Bank  as  RESERVE.  From  the  stand- 
point of  "good  banking"  this  arrangement  has  two  ad- 
vantages. It  helps  overcome  the  limit  set  by  the  gold 
standard  and  at  the  same  time  is  not  unprofitable  to  the 
banks,  but  from  the  standpoint  of  common  sense  to  hold 
one  piece  of  paper  as  reserve  against  another  piece  of 
paper  when  both  pieces  of  paper  are  guaranteed  by  the 
same  government  look  like  a  joke. 

The  foregoing  income  is  obtained  by  figuring  that  all 
the  deposits  made  with  this  bank  are  demand  deposits. 


240  THE  STRANGLE  HOLD 

against  which  it  must  hold  a  seven  per  cent  reserve.  A 
reserve  of  but  3%  is  required  to  be  held  against  time 
deposits,  and,  consequently,  were  all  deposits  time  de- 
posits, the  bank  would  be  able  to  lend  over  twice  as  much 
of  its  credit.  But  without  stopping  to  figure  how  much 
could  be  made  on  time  deposits,  let  us  see  what  could  be 
earned  by  all  the  banks  on  all  the  greenbacks  issued. 

This  problem  of  course  is  a  hypothetical  one,  for  all 
the  greenbacks  outstanding  are  not  held  as  reserves  by 
the  Federal  Reserve  banks,  and  the  problem  assumes 
that  they  are.  It  is,  however,  not  unreasonable  to  sup- 
pose that  they  could  be  so  held,  and,  therefore,  the 
problem  is  of  interest  in  that  it  exposes  the  fallacy  of 
the  reserve  system  and  shows  a  possible  situation  under 
the  Federal  Reserve  Act. 

The  reserve  requirements  of  banks,  which  are  mem- 
bers of  the  Federal  Reserve  System,  varies  according  to 
the  location  of  the  bank.  Banks  in  central  reserve  cities 
are  required  to  carry  with  the  Reserve  bank  a  credit  of 
not  less  than  13%  against  their  demand  deposits,  re- 
serve city  banks  must  have  a  balance  of  not  less  than 
10%,  other  banks  get  off  with  7%,  while  all  are  re- 
quired to  carry  only  3%  against  time  deposits.  Let  us 
take  the  average  of  reserve  against  demand  deposits  as 
10%,  and  consider  all  the  member  banks  as  constituting 
one  bank. 

Then  for  every  $10,000  of  demand  deposits  carried 
this  big  bank  would  be  required  to  have  a  credit  balance 
with  the  Federal  Reserve  of  $1,000  or  10%.  This  bal- 
ance may  be  created  by  depositing  money  or  discountable 
paper,  but  the  Federal  Reserve  must  hold  a  reserve  of 


THE  CONSERVATIVE  BANKER  241 

35%  against  these  deposits  in  either  gold  or  "lawful 
money." 

To  comply  with  the  law  then  the  Federal  Reserve 
holds,  we  will  say,  in  greenbacks,  for  they  are  lawful 
money,  $350  against  ever}'  $1,000  deposited  with  it 
by  the  member  banks.  Since  every  $350  in  greenbacks 
satisfies  the  reserve  requirement  for  credit  with  the  Fed- 
eral Reserve  then  every  $350  worth  of  greenbacks  per- 
mits the  member  bank  to  carry  $10,000  in  deposits. 

Now  let  us  see  how  much  bank  credit  can  be  issued  in 
the  form  of  loans  by  the  member  banks  through  using 
the  full  issue  of  greenbacks  as  the  only  reserve. 

There  are  outstanding  $346,681,000  in  greenbacks 
and  as  the  banks  can  issue  ten  thousand  dollars  of  bank 
credit  for  every  $350  held  in  the  Federal  Reserve, 
divide  the  $346,681,000  by  350  and  multiply  by  10,000. 
It  gives  a  little  less  than  ten  billion  dollars  as  the  amount 
of  bank  credit  which  can  be  issued  against  legal  tender 
notes,  the  despised  greenback  as  the  sole  reserve. 

If  you  can  now  get  hold  of  one  of  these  precious 
greenbacks,  you  will  see  that  they  are  not  redeemable  in 
gold  or  anything  else  and  the  government  will  not  even 
accept  them  for  customs  duties. 

It  is  safe  to  say  that  not  one  person  in  a  million 
knows  or  cares  whether  there  is  a  gold  reserve  behind 
them  or  not. 

Their  value  rests  entirely  on  the  belief  that  they  will 
be  accepted  from  us  at  the  same  value  at  which  we 
accepted  them.  That  is  their  sole  value  is  CONFI- 
DENCE. 

The  banker  by  putting  something  over  three  hundred 


242  THE  STRANGLE  HOLD 

million  dollar's  worth  of  this  form  of  confidence  through 
the  magic  process  of  the  Federal  Reserve  mill  makes 
these  pieces  of  paper  carry  ten  billion  dollars'  worth 
of  his  credit,  which  is  also  confidence. 

In  this  arrangement  we  have  conclusive  proof  of  the 
fact  that  our  development  has  outgrown  the  gold  reserve 
system  for  by  this  use  of  greenbacks  as  reserve  the 
gold  reserve  idea  is  discarded.  It  also  proves  the  cor- 
rectness of  our  whole  contention. 

If  ten  billion  dollars'  worth  of  bank  credit  can  be 
issued  with  nothing  back  of  it  but  CONFIDENCE  why 
not  thirty  or  fifty  or  for  that  matter  a  hundred  billion 
dollars'  worth.'' 

The  point  is  to  be  sure  of  the  confidence.  As  long 
as  that  is  safe  there  is  no  limit. 

By  making  the  people  know  that  every  loan  that  every 
bank  makes  is  perfectly  safe  the  maximum  of  confidence 
would  be  secured  and,  consequently,  our  medium  of 
exchange  would  be  perfected. 

This  use  of  greenbacks  as  reserve  is  a  powerful  argu- 
ment in  favor  of  the  suggestion  made  in  this  book  for 
the  reform  suggested  certainly  would  secure  the  maximum 
of  confidence. 

Instead  of  having  ten  billion  of  our  medium  of  ex- 
change based  on  green  paper  and  the  rest  on  "gilt" 
paper  and  then  allowing  private  interests  to  dictate  its 
use,  why  not  have  it  all  based  on  the  solid  rock  of  sure 
public  confidence  and  permit  everybody  to  use  it  on  equal 
terms?     Is  there  any  reason? 

Again,  since  all  financial  reform  has  always  tended 
toward  and  striven  to  reach  the  goal  of  complete  public 


THE  CONSERVATIVE  BANKER  24S 

confidence  why  not  put  into  effect  a  reform  which  will 
reach  it  and  which  will  always  hold  it? 

The  fact  that  using  the  greenbacks  as  reserve  is  prof- 
itable to  the  banker  is  no  argument  either  in  favor  of 
or  against  that  arrangement  so  no  criticism  is  intended 
by  showing  it.  The  only  object  is  to  complete  the  argu- 
ment that  the  people's  money  has  been  made  a  profitable 
banker's  money. 

We  have  seen  that  on  $350  of  greenbacks  held  as 
reserve  the  banker  can  collect  as  interest  on  every 
$10,000  of  his  credit  issued  an  average  of  say  7% 
or  on  the  ten  billion  dollars*  worth  about  seven  hundred 
million  dollars  per  year.  We  have  also  noted  that  the 
banker  has  nothing  invested.  When  one  considers  that 
this  income  is  made  entirely  out  of  the  people's  laws  and 
the  people's  confidence,  without  any  investment  whatso- 
ever on  the  part  of  the  banker,  the  Wallingford  stories 
seem  not  only  probable  but  quite  tame. 

If  the  foregoing  seems  to  be  an  exaggerated  picture 
of  existing  conditions  let  us  pursue  the  story  and  then 
prove  up  hy  a  few  figures  taken  from  government  docu- 
ments. 

The  Federal  Reserve  banks  are  supposed  to  hold  a 
reserve  of  40%  in  gold  against  federal  reserve  notes 
in  actual  circulation.  The  amount  of  gold  held  Decem- 
ber 1st,  1919,  was  $1,148,724,000  against  which  was  out- 
standing $3,059,652,000  in  federal  reserve  notes.  This 
apparently  is  a  gold  reserve  of  38%  and  only  2%  below 
what  the  law  requires.  Besides  this  issue  against  gold 
reserve  the  Federal  Reserve  banks  can  issue  federal 
reserve  BANK  notes  to  the  full  value  of  all  govern- 


244  THE  STRANGLE  HOLD 

ment  bonds  bearing  the  circulation  privilege  which  they 
have  with  the  United  States  Treasurer,  and  small  bills 
against  United  States  certificates  of  indebtedness,  as 
authorized  by  the  act  of  April  2Srd,  1918. 

Besides  all  this  paper  secured  by  paper  there  are  the 
national  bank  notes  secured  by  government  bonds  or 
an  issue  in  December,  1919,  of  a  little  over  990  million 
dollars  secured  practically  by  paper  only.  Adding  this 
amount  to  $3,059,652,000  of  federal  reserve  notes  gives  a 
little  over  four  billion  dollars  of  paper  money  and  prac- 
tically the  only  gold  held  for  its  redemption  is  the 
$1,148,000,000  in  the  Federal  Reserve  or  about  28%. 

All  this  paper  is  spoken  of  as  our  national  currency 
but  altogether  it  constitutes  but  a  small  portion  of  our 
real  currency  or  medium  of  exchange. 

There  are,  in  round  numbers,  30,000  banks,  state  and 
national,  doing  business  in  this  country.  The  deposits 
in  these  banks  amount  to  about  33  billion  dollars.  If 
our  financial  system  is  really  on  a  gold  basis  all  these 
deposits  are  payable  in  gold.  So  we  have  a  little  over 
one  billion  of  gold  with  which  to  redeem  S3  billion  of 
bank  credit  plus  4  billion  of  paper  money,  or,  37  bil- 
lion of  the  medium  of  exchange.  By  dividing  the  $1,- 
148,000,000  by  the  37  billion  it  shows  we  have  a  reserve 
of  about  3%  of  gold  supporting  our  circulating  medium. 

That  is,  for  every  $100  of  paper  money  and  bank 
credit,  which  practically  makes  up  oui  entire  medium 
of  exchange,  there  is  $3  in  gold.  But  you  say  the 
Comptroller's  report  shows  there  are  about  three  billion 
dollars  of  gold  in  the  United  States  although  but  $1,148,- 
000,000  is  on  deposit  with  the  Federal  Reserve. 


THE  CONSERVATIVE  BANKER  245 

Yes,  and  there  are  also  25  billions  of  government 
bonds  outstanding  besides  billions  upon  billions  of  pri- 
vate bonds,  notes  and  accounts,  all  payable  in  gold.  The 
amount  of  these  debts  payable  in  gold  cannot  be  known 
but  it  is  safe  to  say  they  amount  so  far  into  the  billions 
that  the  percentage  of  gold  to  bills  payable  in  gold  in 
the  United  States  would  not  exceed  1%  or  $1.00  on  the 
$100.  This  is  a  rich  country  and  holds  about  one-half  the 
world's  supply  of  gold.  If  we  could  figure  out  the  per- 
centage of  gold  to  bills  payable  for  all  the  countries 
which  have  based  their  system  of  exchange  on  the  gold 
standard  we  would  require  a  microscope  to  find  the 
answer.  It  would  probably  not  exceed  fifty  cents  on 
the  hundred  dollars. 

If  an  ordinary  mortal  should  promise  to  pay  us  $100, 
when  we  knew  he  possessed  but  fifty  cents  and  we  knew 
full  well  that  he  could  not  possibly  get  any  more  we 
would  look  upon  him  with  great  distrust,  even  with  dis- 
gust; but  when  the  same  promise  under  the  same  condi- 
tions comes  from  the  banker  we  accept  it. 

Most  of  us  can  imagine,  or  have  seen,  a  group  of 
little  girls  "playing  lady."  With  an  old  skirt  of  their 
mother's,  or  of  their  big  sister's,  they  pretend  that  they 
are  grownups,  and  that  a  corner  in  the  attic  is  their 
home.  One  makes  believe  that  she  is  Mrs.  So  and  So, 
and  another  is  Mrs.  Somebody  Else  who  comes  to  call. 
The  whole  point  of  the  game  is  to  "make-believe." 

When  we  can  escape  from  the  magic  spell  of  gold 
and  cast  off  the  fear  of  all  things  financial,  the  force 
of  the  story  here  presented  will  be  readily  recognized. 
The  provision  of  the  Federal  Reserve  Act  wliich  permits 


246  THE  STRANGLE  HOLD 

the  reserve  against  a  promise  to  pay  to  be  carried  in  a 
promise  to  pay  makes  a  farce  out  of  the  gold  standard 
and  the  whole  reserve  system  is  shown  to  be  a  game  of 
"make-believe"  and  becomes  a  joke. 

If  the  gold  reserve  idea,  false  as  it  is  seen  to  be,  were 
necessary  to  a  proper  working  of  our  exchange  system, 
it  would  be  both  unwise  and  unpatriotic  to  attack  it,  for 
naught  but  harm  could  result.  The  true  condition,  how- 
ever, is  the  exact  opposite  for  it  is  not  at  all  necessary 
and  besides  it  is  robbing  the  whole  nation  of  liberty  and 
equality  as  well  as  prosperity  and  happiness. 

This  false  promise  to  redeem  in  gold  has  but  one 
result.  It  continues  the  strangle-hold  of  private  inter- 
ests upon  our  national  life  by  bolstering  up  private  con- 
trol over  the  medium  of  exchange.  It  is  a  smoke  screen 
which  hides  the  truth  that  our  financial  system  is  nothing 
but  a  system  of  bookkeeping.  The  bank  is  a  clearing 
house  for  credits,  nothing  else,  and  it  will  be  a  much 
more  useful  institution  when  the  truth  is  recognized  and 
the  suggested  reform  is  put  into  effect. 


CHAPTER  XVI 
FOREIGN  EXCHANGE 

THE  problem  of  foreign  exchange  exhibits  a  phase  of 
finance  that  has  of  late  been  vividly  called  to  the 
attention  of  the  public.  The  variation  in  the  value  of  for- 
eign money  as  measured  in  dollars  decides  the  course  of 
foreign  exchange.  The  question  on  this  subject  is,  what 
causes  this  variation? 

It  is  a  question  that  is  little  understood  even  by  those 
who  handle  exchange.  Obviously,  then,  it  is  understood 
still  less  by  the  general  public.  As  a  consequence,  a 
number  of  different  explanations  for  this  variation  in 
the  course  of  foreign  exchange  have  been  given.  Let 
us  examine  the  chief  explanations  and  see  whether  they 
are  correct. 

Most  bankers  in  trying  to  explain  the  course  of  for- 
eign exchange,  will  assign  as  the  main  reason,  if  not  the 
entire  reason  for  the  price  of  exchange,  the  difference 
in  the  gold  reserve  held  by  the  various  countries.  The 
banker,  who  is  accustomed  to  deal  in  foreign  exchange, 
ought  to  know  more  about  the  subject  than  others  who 
deal  in  exchange  only  infrequently  or  never.  To  deter- 
mine whether  or  not  the  banker's  explanation  is  correct 
let  us  examine  the  relationship  existing  between  gold 
reserve  and  the  price  of  exchange. 

It  has  already  been  seen  that  in  the  United  States, 
the  richest  country  in  the  world,  there  exists  about  thirty- 

217 


248  THE  STRANGLE  HOLD 

three  billions  of  bank  deposits  and  four  billions  of  paper 
money  resting  on  a  little  over  one  billion  of  gold  held 
as  reserve  or  something  less  than  three  per  cent.  Euro- 
pean countries  are  not  advertising  the  amount  of  their 
gold  reserve  just  now,  so  there  is  no  authentic  informa- 
tion at  hand  on  the  subject.  It  will  be  seen  that  the 
suggestion  is  so  ridiculous,  however,  that  we  do  not 
need  exact  information  in  order  to  show  the  fallacy  of 
connecting  the  price  of  foreign  exchange  with  the  gold 
reserve. 

Let  us  suppose  that  England,  for  instance,  has  no 
gold  at  all.  In  the  United  States  each  dollar  has  about 
three  cents  in  gold  behind  it.  The  par  value  of  an  Eng- 
lish pound  in  our  money  is  $4.86.  Multiplying  this  by 
.03  gives  about  fourteen  and  one-half  cents  as  the  worth 
of  gold  behind  the  equivalent  of  a  pound  in  our  money. 
Since  we  have  assumed  that  there  is  no  gold  behind  the 
pound  in  England  it  is  worth  as  much  less  per  gold 
reserve  as  there  is  less  gold  behind  it  than  behind  its 
equivalent.  Since  there  is  141/0  cts.  worth  of  gold  behind 
$4.86  of  our  money  the  pound  is  only  worth  that  much 
less  than  its  par  value,  so  it  is  worth,  then,  $4.86  minus 
14^  cts.  or  $4.71^2-  If  the  gold  reserve  sets  the  value 
of  a  nation's  medium  of  exchange  and  we  allow  the 
maximum  value  behind  one  and  the  minimum  behind  the 
other,  the  diiference  should  certainly  be  a  conservative 
estimate  of  the  ratio  of  value. 

Since  the  pound  sterling  is  quoted  at  the  present  writ- 
ing at  $3.56,  and  has  been  less,  and  according  to  the 
difference  in  gold  reserve  it  should  be  worth  $4.71%, 
there  is  a  difference  of  $4.71^^  minus,  say,  $3.56   or 


FOREIGN   EXCHANGE  249 

$1.15%  unaccounted  for  by  gold  reserve.  It  is  plain 
there  must  be  some  other  reason  than  gold  reserve  for 
this  difference  of  $1.15%  in  exchange  value.  In  order 
to  locate  the  cause  of  this  difference  of  $1.15%  we  must 
determine  what  other  value  is  behind  the  dollar  and  com- 
pare that  value  with  the  value  behind  the  pound. 

On  examination  we  find  that  the  English  monetary 
system  is  quite  similar  to  our  own.  The  English  law 
requires  that  all  Bank  of  England  notes  must  rest  on 
a  reserve  of  gold  or  government  obligations.  These 
Bank  of  England  notes  constitute  the  paper  money  used 
throughout  Great  Britain  the  same  as  federal  reserve 
notes,  national  bank  notes  and  greenbacks  constitute  the 
paper  money  used  in  this  country.  Our  paper  money 
rests  on  practically  the  same  kind  of  a  basis  as  the 
Bank  of  England  notes,  that  is  gold  reserve  and  gov- 
ernment obligations.  So  the  only  difference  in  value 
would  be  the  difference  in  gold  reserve  and  the  value  of 
the  different  government  obligations. 

The  gold  reserve  is  a  farce  in  both  instances  and  as 
we  have  seen,  accounts  for  but  14%  cts.  on  the  value 
of  the  pound,  under  the  most  favorable  circumstances,  so 
it  may  be  ignored  in  the  search  for  real  sustaining  value. 

On  examination  we  find  that  British  government  obli- 
gations are  more  nearly  worth  par  in  Great  Britain  than 
American  government  obligations  are  in  the  United 
States.  The  value  behind  British  paper  money  then  is 
practically  the  same  as  the  value  behind  our  own. 

As  in  the  United  States,  so  in  Great  Britain,  bank 
credit  constitutes  the  bulk  of  the  medium  of  exchange. 
It  is  issued  in  both  countries  in  practically  the  same 


250  THE  STRANGLE  HOLD 

way,  on  notes  and  mortgages,  and,  therefore,  the  values 
behind  it  are  as  good  in  one  country  as  in  the  other. 
The  difference  of  $1,151/2  in  the  exchange  value  of  the 
pound  cannot,  therefore,  be  found  in  the  sustaining  value 
behind  either  the  paper  money  or  the  bank  credit. 

John  Bull's  note  is  secured  in  the  same  way  as  Uncle 
Sam's.  The  fact  that  John's  note  is  at  a  discount  when 
measured  in  Sam's  money  cannot,  therefore,  be  explained 
upon  the  basis  of  a  difference  in  security. 

In  this  case,  then,  it  is  plain  that  the  gold  reserve 
assigned  by  the  banker  as  a  reason  for  the  price  of  ex- 
change is  erroneous  but  as  there  is  no  difference  in  other 
sustaining  values  the  real  reason  has  not  been  found. 
Let  us  now  examine,  for  instance,  the  exchange  value 
of  the  money  of  the  other  two  large  commercial  coun- 
tries of  Europe,  the  franc  and  the  mark. 

Both  the  French  and  the  German  monetary  systems 
have  progressed  beyond  the  folly  of  gold  reserve.  The 
paper  money  of  both  France  and  Germany  is  issued  in 
the  first  instance  through  the  Bank  of  France  and  in 
the  second  through  the  Reichsbank  on  the  assets  of  the 
bank  as  security.  In  both  instances  it  is  issued  in  prac- 
tically the  same  way  that  bank  credit  is  issued  in  Eng- 
land and  in  this  country. 

The  only  difference  between  the  paper  money  of  these 
two  countries  and  the  bank  credit  of  our  own  is  in  its 
form.  When  a  French  or  German  business  man  goes 
to  the  bank  and  puts  up  his  note  and  securities  for  a 
loan  he  comes  away  with  a  handful  of  paper  money. 
In  this  country  the  loan  he  receives  from  the  bank  is 
represented  by  a  daub  of  ink  in  a  bank  book. 


FOREIGN   EXCHANGE  251 

Practically  the  only  difference  is  in  the  form  of  the 
banker's  promise  to  pay.  In  those  countries  a  banker 
hands  out  his  I.  O.  U.  in  the  form  of  a  bank  note  and 
here  in  the  form  of  an  entry  in  the  customer's  pass 
book.  If  the  banker  here  would  hand  us  national  bank 
notes  and  we  would  use  them  instead  of  his  giving  us 
credit  on  the  bank's  book,  for  us  to  transfer  by  means 
of  a  check,  the  system  would  be  almost  identical  with 
that  of  those  continental  European  countries. 

Since  the  system  of  issuing  the  media  of  exchange 
in  all  three  countries,  though  outwardly  somewhat  dif- 
ferent, are  really  almost  identical  in  principle,  there 
cannot  be  much  difference  in  real  value  between  the 
media  of  exchange  unless  there  is  a  difference  in  the 
security  behind  the  bank  loans.  On  examination,  we  find 
the  securities  which  are  put  up  for  bank  loans  are  sub- 
stantially the  same  in  form  and  effect  and  are  practically 
equal  in  value,  so  the  promises  to  pay  issued  by  the  dif- 
ferent banks  should  be  the  same  in  value.  But  today 
we  find  the  franc  selling  at  about  fifteen  to  the  dollar, 
while  the  par  ratio  is  a  little  over  five  to  the  dollar ;  and 
we  find  the  mark,  with  a  par  value  of  23.82  cents,  sell- 
ing for  the  time  being  at  one  and  one-half  cents.  This 
discrepancy  clearly  indicates,  then,  that  the  difference 
in  the  price  of  exchange  cannot  be  attributed  to  a  differ- 
ence in  system  or  to  a  difference  in  the  value  of  the 
security  behind  the  media  of  exchange  of  the  different 
countries. 

Since  the  banker's  explanation  of  difference  in  gold 
reserve  does  not  explain  and  we  find  no  difference  in 
other  value,  let  us  turn  to  another  attempted  explana- 


252  THE  STRANGLE  HOLD 

tion.  There  is  one  which  bases  the  difference  in  the 
price  of  exchange  upon  the  volume  of  the  medium  in 
circulation  in  the  various  countries,  or  rather,  upon  the 
ratio  of  inflation. 

The  first  country  called  to  mind  in  this  connection  is 
Russia.  Here  inflation  has  been  carried  to  such  an 
extreme  that  the  Russian  rouble  is  almost  valueless  at 
home.  Naturally,  then,  it  is  even  less  valuable  in  for- 
eign exchange ;  and  in  fact  it  has  so  little  value  that  it  is 
no  longer  quoted. 

This  would  seem  to  demonstrate  the  truth  of  this 
second  reason  given  for  the  price  of  exchange.  How- 
ever, even  in  the  case  of  the  rouble,  it  is  not  the  only 
reason;  the  value  of  credit  money  depends  upon  the 
stability  of  the  government  and  the  institution  issuing 
that  money.  Russia  at  present  has  no  government  worthy 
of  the  name.  The  effect  is  the  same  as  the  effect  of 
over-inflation;  it  reduces  the  price  of  the  rouble  in  for- 
eign exchange.  To  over-inflation,  then,  it  is  not  per- 
missible to  assign  the  whole  of  the  abnormal  lack  of 
value  of  Russian  exchange. 

It  would  seem,  therefore,  that  the  ratio  of  inflation, 
while  quite  possibly  one  of  the  factors  affecting  the  price 
of  exchange,  is  by  no  means  the  only  factor.  This  con- 
clusion is  brought  out  still  more  forcefully  in  the  case 
of  exchange  on  England,  France,  and  Germany.  For 
in  these  countries  their  medium  of  exchange  is  inflated 
little  if  any  more  than  ours  is  in  this  country. 

In  the  leading  European  countries  the  rise  in  the  cost 
of  living  since  1914  has  been  no  higher  than  it  has 
been    in    this    country.      In    1914,    however,    exchange 


FOREIGN   EXCHANGE  25S 

between  these  countries  and  the  United  States  was  at 
par  or  practically  so.  And  to  account  for  the  present 
value  of  the  franc,  for  instance,  on  the  inflation  theory, 
the  cost  of  living  in  France  would  have  to  be  relatively 
three  times  as  high  as  it  is  in  this  coimtry,  because  the 
franc  is  about  one-third  par. 

Now  it  is  true  that,  on  account  of  the  adverse  rate  of 
exchange  with  the  United  States,  goods  imported  from 
this  country  to  France  are  three  times  as  high  as  nor- 
mally; for  the  francs  with  which  they  are  bought  are 
selling  at  one-third  their  normal  exchange  rate,  so  in 
figuring  the  cost  of  living,  these  goods  must  be  left  out 
of  the  calculation. 

At  present  it  costs  the  average  American  family  of 
of  three,  we  will  say,  $100  a  month  to  live  in  this 
country.  At  par  this  sum  would  be  equal  to  500  francs; 
a  sum  probably  greater  than  that  which  the  average 
French  family  spends  for  living.  If  inflation,  however, 
made  the  franc  worth  what  the  exchange  rate  quotes, 
then  it  would  cost  the  average  French  family  1500  francs 
per  month. 

The  same  reasoning  applies,  only  with  greater  empha- 
sis, in  the  case  of  Germany.  In  order  to  account  for 
the  German  exchange  rate  on  the  ground  of  inflation, 
the  cost  of  living  there  would  have  to  be  over  fifteen 
times  what  it  was  in  1914.  Taking  the  mark  at  its  pres- 
ent exchange  value,  a  family  of  three  would  have  to 
spend  at  present  about  7,000  marks  montlily  for  living 
on  the  same  scale  as  the  average  American  family  of 
the  same  size. 

While   the   difi'erence   in    inflation,   then,   is   to    some 


254  THE  STRANGLE  HOLD 

extent  a  factor  in  determining  the  present  abnormal 
rate  of  exchange,  it  is  at  most  only  a  minor  factor.  For 
the  fact  is  that,  exclusive  of  goods  which  must  be  im- 
ported, the  cost  of  living  in  England,  France,  and  Ger- 
many is  relatively  little  if  any  higher  than  it  is  here,  if 
we  figure  their  money  at  par.  Or,  in  other  words,  Eng- 
lish money,  French  money,  and  German  money  are  worth 
in  those  countries  as  much  as  they  ever  were  and  as  much 
as  our  money  is  here. 

What  then  is  the  real  cause  for  the  difference  in 
exchange  rates  ?  We  have  seen  that  the  reason  advanced 
by  the  banker,  the  difference  in  gold  behind  the  money  of 
each  country,  is  not  correct  and  that  there  is  practically 
no  difference  in  the  security  behind  each.  We  have  also 
noted  another  reason,  the  relative  inflation,  and  find  it 
to  be  inadequate  to  explain  the  present  price  of  exchange. 
What  then  is  the  real  explanation  ? 

There  are  two  factors  that  account  almost  entirely 
for  the  present  state  of  foreign  exchange.  The  first 
of  these  is  the  balance  of  trade,  and  the  second  the 
position  of  the  foreign  exchange  speculator. 

Trade  can  be  compared  to  a  clearing  house  operation. 
If  I  ship  you  one  hundred  barrels  of  flour  worth  ten 
dollars  a  barrel  and  you  ship  me  ten  barrels  of  dye 
stuff  worth  one  hundred  dollars  a  barrel,  the  transaction 
clears  itself. 

It  may  happen,  however,  that  you  buy  the  flour  from 
me,  but  ship  me  in  return  goods  worth  only  a  part  of  its 
value.  Two  possibilities  arise  at  this  point.  Either  you 
will  pay  me  the  balance  in  money,  or  I  will  trust  you 
to  pay  me  later. 


FOREIGN   EXCHANGE  255 

Perhaps  you  are  unable  to  pay  the  balance  in  money 
immediately.  If  I  have  perfect  confidence  that  you 
will  pay  me  in  goods  or  in  money  at  a  later  date,  then 
it  Avill  be  to  my  advantage  as  well  as  to  yours  to  let  you 
have  the  flour.  For  to  do  so  will  stimulate  trade.  On 
the  other  hand,  to  refuse  to  let  you  have  the  flour  will 
harm  me  as  well  as  you.  For  the  result  of  the  refusal 
will  be  a  lagging  of  the  flour  trade  and  a  decline  in  the 
price  of  flour.  The  slump  in  flour  will  cause  wheat  to 
drop,  resulting  finally  in  a  falling  off"  in  production 
which  will  throw  men  out  of  employment,  cause  a  reduc- 
tion in  wages,  and  general  loss  and  discomfort  to  every- 
body. Obviously,  then,  I  should  be  inclined  to  trust  you 
for  the  flour. 

But  let  us  see  why  I  do  not  trust  you  for  the  flour. 
If  in  this  supposed  case  I  am  an  American  merchant 
and  you  are  a  merchant  in  Europe  we  will  see  what  the 
situation  actually  is  today. 

Europe  has  been  depleted  by  the  war,  and  now  stands 
in  need  of  food  and  raw  materials  from  us.  At  present 
the  merchants  of  Europe  cannot  pay  us  for  the  materials 
they  need,  either  in  goods  or  gold.  By  means  of  our 
goods,  however,  those  people  could  rise  to  their  feet  all 
the  more  quickly,  and  they  would  soon  be  able  to  pay 
us.  We  want  to  let  them  have  the  goods  but  here  again 
the  inefficiency  of  our  financial  system  shows  up  to  block 
business,  and  our  failure  to  sell  is  detrimental,  not  only 
to  them,  but  to  us  also,  and  is  due  to  the  fact  that  our 
financial  system  is  not  elastic  enough  to  permit  us  to 
carry  the  credit. 

Credit,  as  has  already  been  noted,  is  made  up  of  con- 


Q56  THE  STRANGLE  HOLD  \ 

fidence  and  time  and  the  time  is  in  direct  proportion  to 
the  confidence.  Little  confidence,  little  time,  therefore, 
the  reason  why  bank  credit  it  limited  to  30,  60,  and  90 
days  is  because  our  banks  are  not  sure  enough  of  public 
confidence  to  let  their  credit  out  for  a  longer  time.  Bank 
credit  is  our  medium  of  exchange — the  means  of  carry- 
ing on  trade — and  the  exporter  can  not  use  such  short 
time  credit  for  he  must  give  his  customer  a  longer  time 
than  30,  60,  and  90  days. 

Because  of  the  disrupted  condition  in  which  the  war 
has  left  European  industry  the  merchants  there  must 
have  long  time  credit  and  our  banking  system  because 
of  lack  of  public  confidence  cannot  carry  it. 

The  Edge  Act  was  passed  as  an  amendment  to  the 
Federal  Reserve  Act  in  order  to  overcome  this  difficulty 
and  under  it  the  bankers  are  forming  a  one  hundred 
million  dollar  Foreign  Trade  Financing  Corporation  so 
as  to  be  able  to  extend  the  credit  necessary. 

The  exporter  is  in  exactly  the  same  position  as  the 
farmer.  He  cannot  use  30,  60,  and  90  day  money.  He 
must  have  longer  credit  and  since  our  banking  system  in 
its  present  condition  cannot  extend  it  this  special  insti- 
tution is  being  gotten  up  for  his  benefit  just  as  the 
Farm  Loan  Act  was  gotten  up  as  an  attempt  to  over- 
come the  farmer's  difficulties. 

The  Edge  Act  and  the  corporations  formed  under  it 
like  the  Federal  Reserve  and  the  Farm  Loan  Acts  are 
cumulative  evidence  that  all  financial  reform  is  seeking 
to  accomplish  the  result  which  can  be  accomplished  by 
the  remedy  suggested  in  this  book. 

Our  foreign  trade  suffers  from  the  same  old  defect — 


FOREIGN   EXCHANGE  257 

the  false  promise  to  pay  gold,  and  a  lack  of  confidence 
in  the  bank,  due  to  private  control.  It  is,  once  more, 
merely  a  repetition  of  the  same  old  flaw.  The  situation 
that  exists  is  the  same  as  when  lack  of  transportation 
facilities  causes  a  freight  blockade. 

Here,  then,  we  come  back  again  to  that  flaw  which 
is  at  the  root  of  so  many  other  evils,  THE  SELEC- 
TION OF  A  COMMODITY  AS  A  MEDIUM  OF 
EXCHANGE.  It  has  been  shown  how  this  act,  while  a 
natural  step  in  the  evolution  of  trade,  proved  to  be  a 
mistake  and  has  become  the  basic  flaw  in  our  whole  social 
system.  It  has  limited  man's  activities  by  limiting  the 
volume  of  the  medium  by  which  his  activities  have 
always  been  conducted.  In  this  way  it  has  at  all  times 
subjected  all  industry  to  the  will  of  the  few  who  con- 
trolled the  commodity  used  as  an  exchange  medium. 

This  flaw  has  always  caused  and  is  still  causing  most 
of  man's  economic  troubles,  one  of  which  is  the  present 
deplorable  condition  of  our  foreign  trade  and  shipping 
business. 

Business  can  be  carried  on  onlj'^  by  using  the  medium 
of  exchange.  If,  at  any  time,  this  medium  cannot  be 
had  in  sufficient  quantity,  the  business  must  wait  until 
it  is  supj)lied.  The  fact  that  the  medium  is  limited  today 
by  the  supply  of  a  single  commodit}',  gold,  brings  with 
it  the  natural  effect  that  if  the  gold-supply  is  inade- 
quate, business  must  wait  until  there  is  enough  gold  to 
carry  through  the  exchange.  It  amounts  to  the  same 
thing  as  waiting  until  a  car  is  obtainable  before  goods 
can  be  shipped. 

Now  it  is  true  that  we  no  longer  limit  our  medium  of 


258  THE  STRANGLE  HOLD 

exchange  to  the  use  of  gold,  since  we  also  use  paper  and 
bank  credit.  We  have  greatly  expanded  our  medium  of 
exchange,  for  domestic  purposes.  Similarly  every  other 
gold  standard  country  has  expanded  its  medium  for  the 
same  purposes,  and  by  similar  devices.  But  gold  still 
remains  the  only  universally  accepted  medium  of  ex- 
change, and,  consequently,  the  only  means  of  settling 
international  balances. 

By  making  gold  the  basis  of  our  medium  of  exchange 
at  home,  we  have  piled  on  it  a  mass  of  paper  money  and 
credit,  which  we  promise  to  redeem  in  gold.  Although 
we  know  this  promise  cannot  be  fulfilled,  some  gold  must 
be  kept  stored  away  in  vaults,  so  that  through  a  complex 
system  of  reserves  we  can  hypnotize  ourselves  into  be- 
lieving it  to  be  true.  Through  the  juggling  of  reserve 
requirements  we  have  already  stretched  the  little  truth 
there  is  in  the  gold  redemption  promise  to  a  point  where, 
it  is  so  thin  that,  any  one  can  see  through  it,  so  there  is 
real  danger  in  stretching  it  any  further. 

In  foreign  exchange,  therefore,  we  have  a  very  intri- 
cate problem:  the  problem  of  getting  the  exchange 
mechanism  big  enough  to  carry  our  exchange  operations 
and  still  keep  it  on  the  narrow-gauge  gold  track.  All 
our  gold  supply  is  now  used  as  the  basis  of  credit  at 
home.  If  we  ship  gold  out  of  the  country  our  reserve 
shrinks,  and  to  get  things  back  on  balance,  we  must 
reduce  our  credit.  But  the  percentage  of  gold  reserve 
behind  credit  has  become  so  small,  or  in  other  words, 
there  is  so  much  credit  piled  on  so  little  gold,  that  a 
comparatively  small  shipment  of  the  metal  requires  a 
very  considerable  curtailment  of  credit.     This  means  a 


FOREIGN   EXCHANGE  259 

contraction  in  the  medium  of  exchange,  and  we  know 
only  too  well  the  results  of  such  an  act. 

The  whole  situation  reminds  one  of  the  game  of  "jack- 
straws,"  or  a  similar  game  played  with  cards,  where  the 
deck  is  spread  roughly  on  the  table  with  two  cards  form- 
ing a  house  set  on  top  of  the  pile.  The  object  of  the 
game  is  to  see  how  many  cards  can  be  withdrawn  with- 
out shaking  down  the  house.  And  the  object  of  the 
financial  game,  or  the  problem  for  some  super-financier 
is:  how  can  enough  gold  be  pulled  out  from  under  the 
pile  of  paper  money  and  credit  at  home  to  settle  foreign 
trade  balances,  without  shaking  down  the  structure  of 
credit  ? 

At  first  sight  this  might  seem  to  be  a  question,  at  pres- 
ent, for  European  coimtries  to  answer,  but  before  we 
proceed  much  further  it  will  be  shown  that  it  is  our  prob- 
lem. 

We  shall  not  attempt  to  answer  this  question  as  above 
stated  but  it  might  be  suggested,  that  if  instead  of  keep- 
ing up  the  reserve  bluff,  we  should  put  one  hundred  per- 
cent confidence  behind  our  paper  money  and  our  bank 
credit,  by  the  simple  means  of  public  control  already 
explained,  we  could  extend  credit  where  credit  was  due 
and  revive  our  drooping  foreign  trade.  We  would  not 
need  foreign  trade  financing  corporations,  nor  any  of 
the  other  devices  intended  to  accomplish  this  purpose. 

And  here  we  come  to  the  second  factor  determining 
the  price  of  exchange.  The  first  factor,  the  one  which 
plays  the  larger  part  in  determining  the  exchange  ratio 
of  foreign  money,  is  the  balance  of  trade.  The  second 
factor  is  the  speculator,  and  the  speculator  comes  into 


260  THE  STRANGLE  HOLD 

the  field  only  because  the  medium  of  exchange  is  so 
limited  that  foreign  trade,  like  agriculture,  cannot  be  car- 
ried on  through  the  legitimate  channels  of  credit. 

Europe  has  been  depleted  by  the  war.  Property  has 
been  destroyed,  factories  dismantled,  material  wasted, 
and  business  organization  disbanded.  Great  quantities 
of  raw  material,  machinery,  food,  etc.,  are  needed  for 
rehabilitation.  Europe  has  no  gold  with  which  to  pay 
for  these  things,  and  the  credit  of  our  bankers  with  its 
time  limit  of  90  days  cannot  be  issued  for  a  time  suffi- 
ciently long  to  permit  our  exporters  to  get  goods  back 
in  return  for  those  shipped. 

Some  other  way  of  payment  for  these  exports  must 
therefore  be  found.  Gold  cannot  be  used  in  payment, 
for  the  lack  of  confidence  in  banks,  due  to  private  con- 
trol, keeps  the  gold  buried  in  vaults  to  make  good  the 
gold  payment  bluff.  The  only  way  left  open  is  to  go 
to  the  speculator. 

The  American  exporter  takes  the  foreign  purchaser's 
acceptance,  or  his  drafts,  or  checks  on  a  foreign  bank,  in 
payment  for  the  goods.  He  cannot  use  these  at  his  bank 
for  his  credit  is  limited  by  the  banker's  short  time  money, 
consequently  he  must  sell  these  drafts  to  raise  current 
funds  so  he  goes  to  a  speculator. 

This  involves  selling  the  foreign  credit  at  a  discount, 
and  since  the  greater  the  export  trade,  the  greater  the 
supply  of  those  instruments  of  credit  received  and 
offered  for  sale,  consequently  the  greater  the  discount. 

And  so  the  value  of  foreign  exchange  depends  upon 
the  price  the  speculator  will  pay  for  it. 

Now  the  speculator's  price  will  depend,  not  upon  the 


FOREIGN  EXCHANGE  261 

intrinsic  value  of  the  foreign  credit,  but  upon  the  amount 
of  it  offered  and  the  state  of  the  money  market.  In 
other  words,  the  price  of  "call  money"  in  New  York. 
The  rate  on  "call  money"  then  is  the  barometer  not  only 
for  the  prices  of  stocks  and  bonds,  but  for  the  price  of 
foreign  exchange.  It  is  evident  then  that  the  discount 
rate  fixed  by  a  committee  of  New  York  brokers  controls 
the  price  of  foreign  exchange  and  through  it  the  volume 
of  foreign  trade,  which  in  turn,  affects  the  price  of  our 
exports,  especially  wheat  and  cotton.* 

There  are,  therefore,  two  valid  reasons  why  foreign 
exchange  rates  vary.  The  first  factor  is  the  balance  of 
trade.  When  we  export  more  tlian  we  import,  that  is, 
when  the  balance  of  trade  is  in  our  favor,  there  is  created 
a  demand  for  credit  to  the  foreign  purchaser.  To  obtain 
this  credit  the  foreign  purchaser  offers  his  local  credit  in 
terms  of  the  money  of  his  location.  This  foreign  credit  is 
good  but,  like  tlie  farmer's  credit,  must  run  for  more  than 
ninety  days  so  it  is  discounted  to  the  speculator  by  the 
exporter  because  his  bank  is  too  weak  in  public  confi- 
dence to  carry  it.  When,  as  is  the  case  today,  there  is 
much  of  this  foreign  credit  and  call  money  is  high,  the 
value  of  foreign  credit  goes  down  just  as  stocks  go 
down,  and  all  other  prices  tend  downwards. 

But  what  is  the  effect  of  this  condition  on  the  foreign 
customer?  The  greater  the  discount,  the  less  his  credit 
is  worth  to  the  exporter.  The  latter,  then,  must  either 
raise  his  prices  in  terms  of  the  foreign  money,  or  quote 
them  in  terms  of  domestic  money.  In  either  case  the 
foreign  customer  must  stand   an   increased  cost.      This 

*See  Appendix,  page  307. 


262  THE  STRANGLE  HOLD 

cost  increase  is  due  to  the  discoimt  which  the  speculator 
demands  for  turning  foreign  credit  into  domestic  credit 
and  not  to  any  increase  in  the  selling  price  of  the  goods, 
nor  in  the  profit  to  the  American  producer. 

The  result  is  that  this  discount  on  foreign  credit  cuts 
down  our  export  trade,  because  it  continues  to  increase, 
without  profit  to  the  producer  until  the  price  of  our 
goods  to  the  foreign  customer  becomes  prohibitive.  He 
has  to  stop  buying. 

It  is  of  the  utmost  importance  to  notice  in  this  con- 
nection that  the  fall  in  exchange  does  not  injure  the 
foreigner  so  much  as  it  injures  ourselves.  We  are  anxious 
to  sell  goods  to  them  but  the  trade  is  stopped  because  our 
financial  system  is  not  big  enough  and  strong  enough 
to  carry  the  exchange. 

The  same  condition  is  presented  as  would  exist  if  our 
shipping  business  were  confined  to  the  use  of  wooden 
tubs  such  as  Columbus  used.  We  are  using  a  weak  and 
antiquated  system  of  finance  which  causes  demand  to 
automatically  raise  the  price  of  our  goods  so  high  that 
other  people  cannot  afford  to  pay  for  them. 

This  fall  in  exchange  value  puts  a  break  on  foreign 
trade  just  as  a  rise  in  the  interest  or  discount  rate  puts 
the  break  on  domestic  business. 

Again,  we  see  the  gold  redemption  promise  and  the 
private  control  which  it  fosters  as  unyielding  opponents 
of  prosperity  and  business  expansion.  It  puts  our  in- 
dustries and  commerce  in  a  strait- j  acket  and  by  bind- 
ing our  financial  system  to  the  service  of  private  inter- 
ests reduces  our  efficiency  and  retards  our  development. 
The  gold  payment  promise  is  a  molock  against  which 


.    FOREIGN   EXCHANGE  263 

the  banker  is  as  helpless  as  the  rest  of  us.  Prosperity 
depends  on  business  and  business  consists  of  exchange. 
We  must  make  the  medium  big  enough  and  strong 
enough  to  carry  all  that  is  offered  just  as  we  want  a 
merchant  marine  big  enough  to  carry  our  goods. 

It  is  impossible  to  over-emphasize  the  fact  that  the 
abnormal  rates  of  exchange  existing  today  are  more  of  a 
disadvantage  to  us  than  to  foreigners,  although  they  are 
apparently  in  our  favor. 

The  fall  in  the  price  of  exchange  is  generally  sup- 
posed to  militate  against  the  interests  of  the  foreign 
people  by  making  them  pay  high  prices.  In  reality  it 
is  just  the  opposite.  It  shuts  their  doors  to  our  export 
trade  but  opens  wide  our  door  to  imports. 

The  fall  in  the  price  of  exchange  operates  in  two 
ways  against  us.  By  making  our  goods  dear  in  their 
money  it  shuts  off  our  export  trade  and  by  making  their 
goods  cheap  in  our  money  it  booms  our  import  trade. 
This  condition  is  just  the  reverse  of  the  one  desired. 

To  illustrate  this  point  let  us  take  the  cotton  trade 
as  an  example.  Europe  was  our  best  customer  in  this 
line.  When  the  war  came  and  this  market  was  closed 
there  was  a  big  slump  in  the  price  of  cotton.  The  dis- 
tress of  our  cotton  growers  at  that  time  is  quite  memor- 
able. Government  purchases  during  the  war  relieved 
the  situation,  but  now  the  price  has  slumped  again  be- 
cause our  foreign  market  cannot  be  restored  on  account 
of  the  exchange  situation. 

Take  cotton  that  is  worth  say  40  cts.  per  lb.  as  it  was 
in  the  spring  of  1920,  and  say  it  costs  3  cts.  to  get  it 
to  England  making  the  price  in  England  without  profit 


264  THE  STRANGLE  HOLD 

for  the  seller  43  cts.  per  lb.  The  exchange  rate  of 
$3.50  per  pound  sterling  for  example  made  the  price  of 
cotton  in  England  about  60  cts.  per  lb.  And  England 
naturally  curtalied  purchases  to  the  minimum. 

But  note  hoAV  the  exchange  rate  affected  Germany 
which  would  have  been  and  still  would  be  a  very  large 
buyer  of  cotton  if  our  financial  system  permitted.  The 
German  mark,  normally  worth  23.82  cents  in  our  money, 
has  now  fallen  to  around  1.5  cents,  because  the  balance 
of  trade  is  against  Germany.  This  rate  of  exchange 
would  make  cotton  costing  40  cents  per  poiind  in  this 
country  with  a  3  cent  freight  rate  cost  in  Germany 
almost  27  marks  per  pound  or  at  the  pre  war  dollar 
price  of  the  mark  $6.43  per  lb.  That  is  cotton  that 
is  worth  40  cts.  per  lb.  here  with  a  3  ct.  freight  rate, 
is  worth  at  the  present  price  of  exchange,  $6.43  per 
pound  in  German  money.  Under  such  circumstances 
it  is  quite  evident  that  Germany  even  though  in  great 
need  of  it  will  buy  but  little  cotton. 

Other  European  countries  are  shut  out  from  buying 
our  goods  for  the  same  reason  as  England  and  Ger- 
many are. 

The  foreign  exchange  situation  is  an  illustration  of 
the  effect  of  our  short  time  and  shaky  credit  upon  our 
foreign  trade.  The  medium  of  exchange  supplied  by 
our  banks  under  private  control  is  not  able  to  carry  it. 
Our  exporters  are  shut  out  of  the  bank  for  the  same 
reason  as  the  farmer  always  has  been,  and  the  auto- 
mobile dealer  recently  has  been.  Through  the  weakness 
of  our  banking  system  legitimate  business  is  driven  to 
seek  the  speculator  for  financial  relief. 


FOREIGN   EXCHANGE  265 

Foreign  exchange  would  practically  come  to  par,  and 
our  export  trade  would  be  flourishing  if  our  financial 
system  were  enlarged  by  the  method  suggested.  This 
change  would  help  the  shipping  business,  the  farmer, 
and  everybody  else.  The  Edge  Act  attempts  to  ac- 
complish the  same  object  but  only  by  doctoring  a 
symptom.  A  cure  can  be  accomplished  in  a  practical 
way  by  adding  thirty  words  to  the  Federal  Reserve  Act 
as  suggested. 


CHAPTER  XVII 
NATIONAL  EFFICIENCY 

LABOR  through  trade  supports  and  advances  civili- 
zation. A  means  of  producing  labor  and  carrying 
on  trade  is,  therefore,  necessary.  The  only  efficient  way 
so  far  found  is  by  rewarding  effort.  Slave  labor  proved 
inefficient  because  there  existed  a  lack  of  incentive  to 
work  on  the  part  of  the  slave.  It  consequently  follows, 
that  the  better,  safer  and  more  accessible  the  means  used 
to  reward  labor  and  conduct  trade,  the  greater  will  be 
the  civilization  produced. 

Since  the  efficiency  of  a  nation  depends  primarily 
upon  its  trade  and  since  trade  cannot  be  conducted 
without  the  medium  of  exchange  which  is  the  present 
recognized  form  of  producing  labor  and  conducting 
trade,  therefore,  if  the  medium  of  exchange  is  not  to  be 
obtained  the  man  power  lies  idle  and  resources  remain 
undeveloped.  Such  a  condition  must  exist  until  the 
medium  of  exchange  is  at  hand  to  bring  labor  and  the 
natural  resources  of  a  country  together  for  the  produc- 
tion of  those  things  which  improve  living  conditions. 

But  despite  the  great  part  that  money  or  reward  of 
effort  has  played  in  the  development  of  the  world's 
civilization  little  scientific  study  has  been  made  of  it. 
Although  trade  and  commerce  have  been  given  a  great 
deal  of  attention  very  little  unbiased  study  has  been 
applied  to  the  medium  so  essential  in  carrying  on  the 

266 


NATIONAL  EFFICIENCY  £67 

process  of  trade.  Most  improvements  in  the  medium  of 
exchange  have  been  the  result  of  the  slow  process  of 
evolution  due  to  self  interest,  or  to  accident. 

It  is  hardly  possible  to  give  too  much  attention  to 
the  elements  necessary  in  an  efficient  means  of  reward- 
ing effort  and  conducting  trade. 

It  is  evident  that  a  financial  system  which  for  any 
reason  is  so  restricted  that  it  does  not  bring  together 
the  man  power  and  the  resources  of  a  country  will  retard 
development.  The  effect  is  similar  to  lack  of  trans- 
portation facilities. 

The  medium  of  exchange  must  not  only  be  safe  and 
elastic  but  it  must  be  available  for  use  at  all  times.  The 
greater  the  safety,  elasticity  and  availability  the  greater 
will  be  the  efficiency  of  the  medium  of  exchange  and  the 
well  being  of  the  people  will  be  in  proportion. 

It  follows,  then,  that  the  different  degrees  of  efficiency 
displayed  by  the  people  of  different  countries  is  due  to 
a  difference  in  their  financial  systems. 

Most  of  the  commercially  important  countries  have 
adopted  the  gold  standard  so  there  is  no  difference  in 
that  respect.  We  must  go  beyond  that  point  to  find  the 
real  cause  of  their  difference  in  efficiency.  We  must 
look  into  the  conditions  relating  to  the  real  medium  of 
exchange,  which  is,  in  all  commercially  important  coun- 
tries, just  as  in  this  country,  some  form  of  bank  credit. 
Consequently  the  variations  we  seek  must  be  found  in 
a  difference  in  banking  methods. 

In  this  investigation,  the  first  thing  to  be  noticed  is 
the  fact  that  practically  all  European  countries  have 
long  since   adopted  the   central   bank   idea,   which   the 


268  THE  STRANGLE  HOLD 

United  States  finally  arrived  at  in  a  roundabout  way 
through  the  adoption  of  the  Federal  Reserve  Act. 

The  Bank  of  England,  to  name  the  most  familiar 
bank  of  Europe,  consists  of  a  central  bank  with  nine 
branches.  It  is  a  private  corporation,  managed  by  a 
board  of  directors,  chosen  by  the  stockholders,  with  a 
banking  department  and  a  note  issue  department,  con- 
ducted separately.  This  Bank  acts  as  reserve  depository 
for  practically  all  the  banks  of  the  United  Kingdom, 
and  has  the  exclusive  right  of  note  issue.  This  note 
issue  is  limited  and  is  based  on  government  securities 
and  gold.  The  people  are  served  generally  by  means 
of  a  number  of  lesser  banks,  privately  owned  and  man- 
aged. 

In  this  system  there  are  two  defects,  the  first  being 
private  management  which  precludes  one  hundred  per- 
cent confidence  and  thus  one  hundred  percent  safety, 
and  also  precludes  equal  service  to  all  members  of  the 
community.  Such  arbitrary  power  can  not  possibly  be 
used  with  justice  to  all. 

The  second  flaw  is  tliat  in  this  system  the  volume  of 
the  medium  of  exchange  is  determined  not  by  the  de- 
mands of  business,  as  it  should  be,  but  by  the  amount 
of  government  obligations  and  the  value  of  the  gold 
held  by  the  bank. 

The  system  is  non  elastic  because  of  the  fact  that  the 
only  considerations  for  note  issue  are  government  obli- 
gation and  gold.  Neither  of  these  elements  are  respons- 
ive to  commercial  activity  or  to  the  growth  of  business 
due  to  increase  of  population. 

The   English   system,  then,   falls   very   short   of  the 


NATIONAL  EFFICIENCY  269 

mark  of  one  hundred  percent  safety  and  one  hundred 
percent  elasticity.  It  is  evident  that  no  privately-con- 
trolled institution,  operated  for  private  gain,  can  hold 
one  hundred  percent  confidence  of  the  people,  and  the 
safety  of  any  credit  system  is  in  direct  proportion  to 
public  confidence. 

As  the  amount  of  the  note  issue  depends  upon  the 
government  obligations  and  gold  held,  and  as  the  volume 
of  credit  depends  upon  the  amount  of  the  notes  put  into 
circulation,  it  is  evident  that  the  system  has  a  very  low 
degree  of  elasticity.  Its  basis  of  note  issue  is  in  no  way 
responsive  to  the  fluctuating  demands  of  business.  Pri- 
vate control  also  detracts  from  elasticity,  because  it 
serves  the  interests  in  control  and  fails  to  serve  the 
whole  community  impartially. 

The  Bank  of  France  is  a  private  institution  with 
numerous  branches.  It  is  managed  by  a  board  of 
directors  representing  the  stockholders.  However,  the 
government  has  a  semblance  of  control  through  the  gov- 
ernor and  t\vo  deputy  governors,  appointed  by  the  head 
of  the  state  from  among  the  stockholders.  The  bank 
has  the  exclusive  right  of  note  issue,  the  amount  of  which 
is  limited  by  legislation.  This  amount  is  varied  from 
time  to  time  in  anticipation  of  commercial  needs.  The 
note  issue  is  based  on  the  bank's  assets. 

While  this  system  has  passed  beyond  the  folly  of  a 
gold  reserve  the  fault  in  the  system  is  still  two-fold:  in 
that  private  interests  are  in  control,  which  detracts  from 
safety  and  also  from  elasticity  as  in  the  English  system. 

Secondly,  the  note  circulation  is  fixed  by  the  legisla- 
ture— a  non  commercial  agency  which  prevents  the  vol- 


270  THE  STRANGLE  HOLD 

ume  of  the  medium  of  exchange  from  being  fixed  by  the 
demands  of  business  as  it  should  be. 

The  Reichsbank,  in  the  days  of  the  German  Empire, 
was  a  private  institution  controlled  by  a  president  and 
board  of  directors  who  were  appointed  for  life  by  the 
head  of  the  state  and  who  were  not  permitted  to  hold 
stock  in  the  bank.  They  were,  therefore,  government 
officials  and  not  private  employees.  The  bank  had  the 
right  to  issue  a  fixed  amount  of  uncovered  notes  and  a 
practically  unlimited  amount  of  secured  notes,  two-thirds 
of  which  were  based  on  commercial  paper  and  the  other 
third  on  "cash"  not  necessarily  gold. 

This  proposition  of  basing  the  note  issue  on  the  bank's 
assets,  that  is  to  say,  mortgages,  notes,  acceptances,  etc., 
was,  no  doubt,  due  to  the  fact  that  Germany  could  not 
procure  gold  as  England  could,  for  she  had  little  foreign 
commerce  at  the  time  the  Reichsbank  was  established, 
J  875,  and  no  possessions  where  gold  was  produced. 
Consequently  she  happened  to  adopt  a  financial  system 
which  did  not  have  gold  as  a  basis  of  note  issue. 

This  system,  when  put  into  efi'ect,  increased  the  elas- 
ticity of  the  medium  of  exchange  for  it  was  limited  only 
by  the  confidence  that  the  people  had  in  the  power  that 
controlled  the  bank. 

The  good  results  were  produced  because  the  system 
gave  a  broader  basis  to  the  country's  credit.  Practically 
the  only  check  on  note  issue  was  a  tax  imposed  on  the 
surplus  when  the  reserve  fell  below  thirty-three  and 
one-third  percent  of  the  secured  note  issue. 

Here  then  is  quite  a  departure  from  the  banking 
methods  of  other  countries.     This  system  was  the  only 


NATIONAL  EFFICIENCY  271 

financial  system  from  which  private  control  had  been 
partially  eliminated,  and  the  only  one  which  made  com- 
mercial activity  its  limit  of  credit. 

This  difference  of  government  control  instead  of  pri- 
vate control,  and  this  note  issue  based  on  commercial 
paper,  the  volume  of  which  depended  on  business  activ- 
ity, were  the  points  of  excellence  in  the  system  which 
made  it  superior  to  others.  In  this  superiority  in  her 
exchange  system  we  find  the  real  source  of  the  much 
vaunted  German  efficiency  and  achievement.  However, 
while  this  system  fitted  an  imperial  form  of  government 
it  could  not  serve  a  democracy  because  the  idea  of  pub- 
lic control  in  the  case  of  Germany  was  due  to  the  auto- 
cratic idea  of  making  all  interests  subservient  to  the 
state.  In  a  democracy,  the  United  States  for  instance, 
public  confidence  could  not  be  gained  by  such  an  ar- 
rangement. Confidence  in  banks  to  be  secure  here  must 
rest  on  exact  knowledge.  The  people  must  know  of  their 
own  knowledge  that  bank  loans  are  on  good  security. 

But,  the  two  provisions,  of  partial  public  control  and 
a  commercial  basis  for  credits,  supplied  the  necessary 
elements  of  safety  and  elasticity  to  Germany's  medium 
of  exchange  in  a  greater  degree  than  they  were  supplied 
to  the  medium  of  any  other  country,  and,  therefore,  its 
efficiency  was  proportionately  greater  and  was  reflected 
in  Germany's  commercial  achievement. 

The  commercial  advancement  here  mentioned  is  in 
direct  contrast  with  the  commercial  achievement  of  one 
of  the  largest  nations  of  the  world — China. 

An  old  Chinese  custom  obliged  every  honorable  China- 
man, as  well  as  his  eldest  son,  to  commit  suicide  if,  on 


272  THE  STRANGLE  HOLD 

the  coming  of  the  Chinese  New  Year,  he  found  himself 
unable  to  settle  his  outstanding  debts  and  start  the  new 
year  with  a  clean  sheet.  If  he  lacked  the  courage  to 
impose  death  on  himself  and  his  unoffending  son,  he 
was  sent  to  prison  or  perhaps  to  the  headsman,  and  all 
his  relatives  to  the  forty-second  degree  "lost  their  face" 
until  his  debts  were  paid. 

This  system  may  have  enforced  honesty.  It  has  often 
been  referred  to  by  American  business  men  unable  to 
collect  bad  debts.  Economically,  however,  it  was  a  most 
effective  way  of  squeezing  out  of  a  people  the  last  drop 
of  initiative  and  enterprise.  Each  man  played  crabbedly 
and  timidly  and  as  a  result,  the  people  lived  as  miserably 
as  rats  in  a  country  of  good  natural  resources. 

These  natural  resources  have  not  been  developed  be- 
cause China  never  has  adopted  a  medium  of  exchange 
which  would  gain  and  hold  the  confidence  of  her  people 
and  that  was  elastic  enough  to  permit  her  man  power 
to  be  employed.  Chinese  exchange  is  carried  on  prin- 
cipally by  the  use  of  metal  as  a  medium  of  exchange. 
This  rigid  and  narrow  exchange  medium  puts  China  into 
a  financial  strait-jacket.  Imagine  an  American  busi- 
ness man  settling  an  account  with  a  few  bars  of  silver 
or  a  wheelbarrow  filled  with  "cash,"  as  the  cheap  brass 
coins,  perforated  and  strung  on  strings  are  called, 

China's  lack  of  enterprise  and  progress  is  due  to  a 
financial  system  so  cramped  that  it  does  not  permit  her 
man  power  to  be  employed  sufficiently  to  supply  the 
needs  of  the  nation. 

We  have  noted  the  financial  systems  of  England, 
France,  Germany  and  China  and  the  different  effects 


NATIONAL  EFFICIENCY  273 

which  the  different  systems  have  had  on  the  national 
efficiency  of  these  countries. 

History,  instead  of  noting  commercial  advancement 
and  its  causes,  consists  of  a  chronicle  of  wars  and 
dynastic  and  political  changes  with  comemrcial  and  in- 
dustrial development  as  a  side  light. 

Could  tlie  history  of  the  world  be  written  in  the 
light  of  real  human  achievement  and  well-being  it  would 
be  found  that  advancement  in  civilization  is  due  to  im- 
provement in  industrial  and  commercial  methods. 

Industry  and  commerce  are  entirely  dependent  upon 
labor,  mental  and  physical,  and  since  labor  is  not  a 
natural  instinct  of  man,  but  must  be  induced  by  the 
hope  of  reward,  it,  therefore  follows,  that  all  advance- 
ment in  civilization  is  the  result  of  improvement  in  the 
means  of  producing  and  rewarding  labor.  That  is  to 
say,  it  is  dependent  upon  the  development  of  a  more 
efficient  medium  of  exchange. 

Civilization  is  the  result  of  exchange,  therefore,  social 
betterment  is  due  to  improved  methods  or  means  of  ex- 
change. 

It  follows  then,  that  since  the  medium  of  exchange  is 
the  ladder  by  means  of  which  humanity  has  climbed 
from  barbarism  to  our  present  state  of  social  develop- 
ment that  further  advancement  is  dependent  on  still 
greater  improvement  in  this  medium. 

By  taking  note  of  known  facts  and  by  logical  conclu- 
sions we  have  seen  the  value  of  safety  and  elasticity  in  a 
medium  of  exchange  and  found  that  the  principle  which 
produces  these  essentials  is  public  control.  The  control 
of  the  medium  of  exchange  must  be  expressed  through  a 


^74  THE  STRANGLE  HOLD 

system  by  which  the  volume  of  the  medium  is  regulated 
by  the  requirements  of  business — the  very  principles 
advocated  in  these  pages. 

Public  control  can  be  secured  in  a  perfectly  democratic 
manner  without  any  radical  change.  It  implies  no  ma- 
terial alteration  in  our  present  banking  and  financial 
system.  All  that  it  really  needs  is  the  modification  of 
the  present  system  so  that  its  control  shall  be  in  accord- 
ance with  the  principles  we  have  demonstrated  to  be 
correct. 

We  need  only  to  place  the  granting  of  loans  on  their 
intrinsic  merits,  displacing  the  private  judgment  of  the 
banker  with  the  exact  information  of  the  various  markets, 
and  of  the  assessor  imder  a  reformed  plan  of  assess- 
ment. The  right  of  appeal  from  the  board  of  review 
or  equalization,  and  a  final  settlement  by  a  jury  where 
personal  interest  dictates  the  verdict  will  absolutely 
guarantee  correct  valuation. 

Public  control  of  the  greatest  of  our  public  utilities 
— our  medium  of  exchange — would  thus  increase  our 
present  meager  portion  of  individual  and  collective  effi- 
ciency to  a  full  one  hundred  per  cent.  Not  only  would 
we  benefit  personally  and  nationally  but  the  cause  of 
civilization  and  the  welfare  of  all  humanity  would  be 
advanced. 


CHAPTER  XVIII 
THE  CONCLUSION 

SOME  of  those  who  have  read  these  pages  may  feel 
that  the  change  proposed  will  be  an  infringement 
upon  the  rights  of  the  banker.  They  may  still  think 
that  it  is  the  banker's  money  that  is  being  loaned  and, 
consequently,  they  may  feel  that  the  banker  should  have 
no  restrictions  placed  upon  his  loans.  If  it  were  his 
money  perhaps  he  should  be  allowed  to  loan  to  whom 
he  wishes,  when  and  where  and  in  any  manner  he  pleases, 
but  this  is  not  the  case. 

To  answer  this  possible  objection  we  need  only  re- 
mind the  reader  that  the  banker  does  not  lend  money. 
He  lends  bank  credit  which  has  displaced  money  and  is, 
therefore,  a  public  utility.  Its  value  rests  entirely  on 
the  people's  laws  and  the  people's  confidence  and  not 
at  all  on  the  banker's  money  or  his  personality.  It  wiU 
be  seen,  therefore,  that  the  proposed  regulation  is  not 
only  justified  but  necessary.  And  if  any  doubt  still 
remains,  it  should  be  swept  away  by  a  consideration  of 
the  enormous  public  advantages  that  would  be  gained. 
For  when  we  reflect  that  the  loans  made  by  the  banker 
constitute  our  medium  of  exchange,  the  tool  with  which 
we  produce  and  carry  on  trade,  the  means  by  which 
labor  is  induced  and  rewarded,  the  element  which  every 
person  must  use  in  order  to  enjoy  those  blessings  of  life, 
liberty,  and  the  pursuit  of  happiness  guaranteed  by  our 

275 


276  THE  STRANGLE  HOLD 

Declaration  of  Independence,  the  situation  is  put  in  a 
very  different  light. 

A  person  in  a  civilized  community  cannot  apply  his 
energies  to  the  development  of  the  resources  of  the 
country  vsdthout  the  use  of  the  medium  of  exchange.  It 
follows,  therefore,  that  control  of  this  utility  controls 
the  energy,  the  activity  and,  in  fact,  the  whole  life  of 
the  community.  The  effect  of  bank  control  of  this  great 
public  utility  can  be  graphically  demonstrated  as  fol- 
lows: 

In  the  following  diagram  let  E.  represent  the  ener- 
gies of  all  the  people  and  R.  the  resources  of  the  coun- 
try, such  as  all  the  land,  timber,  waterpower,  mineral 
wealth,  etc. 

In  the  United  States  there  is  about  one  bank  to  every 
4,000  inhabitants  so  the  bank  window  in  the  diagram 
should  be  about  one  four  thousandth  part  of  the  size  of 
the  energy  of  the  people. 

With  the  bank  in  control  of  practically  all  of  the 
medium  of  exchange,  that  is,  all  of  it  except  the  small 
change  the  merchant  has  in  his  till  or  the  little  we  carry 
for  minor  necessities ;  it  is  evident  that  in  order  to  use 
this  public  utility  to  any  practical  extent,  the  banker 
must  be  consulted.  Therefore,  the  energies  of  the  com- 
munity cannot  be  directly  applied  to  the  resources  of 
the  country  but  must  pass  through  the  bank  window  as 
shown  in  diagram  No.  1.  Those  who  are  fortunate 
enough  to  secure  the  use  of  the  medium  of  exchange  to 
an  extent  great  enough  so  they  can  apply  their  energies 
will  employ  some  of  those  who  are  not  so  fortunate,  and, 
therefore,  these  lines,  after  passing  through  the  bank 


THE  CONCLUSION 


277 


window,  should  diverge  somewhat,  in  practice;  but,  if 
we  consider  only  those  who  are  thus  permitted  a  degree 
of  freedom  of  action,  these  lines  should  not  diverge, 
but  will  be  as  in  Diagram  No.  1.  We  see  tlien,  that 
our  present  efficiency,  with  liberty,  is  compressed  to  a 
small  portion  of  that  which  the  whole  energy  of  the 
people  could  produce.  It  is  limited  by  the  energy  per- 
mitted, to  get  through  the  bank  window. 


DIAGRAM  No.  1 

R 

Bank  wfadow  under 
private  control. 

KESOU.'iCE^  OF 
TOE  GiUNIRV 

ii 

Ptaorr  EfriciencY 

ENERGY 

OF  ALL 

JHEPEOPIE. 


This  diagram  shows  the  result  of  private  control  of  the 
greatest  public  utility  which  makes  the  use  of  the  medium 
of  exchange  A  PRIVILEGE. 

Substituting  public  control  for  private  control  of  our 
medium  of  exchange  by  displacing  the  private  bank 
appraiser  by  a  public  appraisement  and  the  "finance 
committee"  of  the  directors  by  a  public  functionary 
would  make  the  medium  of  exchange  usable  on  the  initi- 
ative of  each  individual  and  on  the  same  terms  by  all. 
The  bank  window  would  be  greatly  enlarged  and  the 
energies  of  the  people  could  then  be  applied  directly 
to  the  resources  of  the  country.  This  change  would 
cause  a  great  increase  of  efficiency  as  shown  in 


278 


THE  STRANGLE  HOLD 


DIAGRAM  No.  2 


y\N\\\\\\\\\\\\\\v\< 


RESOURCES  OF 
THE  COUNTRY 


WIESCNT  tFFICItNOr 


This  diagram  shows  the  effect  of  public  control  of 
the  greatest  of  public  utilities  which  makes  the  use  of 
the  medium  of  exchange  A  RIGHT. 

By  public  control  we  would  not  only  increase  our 
personal  and  national  efficiency  from  the  present  meager 
portion  to  100%,  but  our  liberty  and  democracy  would 
be  increased  in  the  same  ratio. 

Social  development  decreed  that  something  was  neces- 
sary as  a  measure  and  as  a  means  of  rewarding  effort. 
The  first  law  of  nature,  self  preservation,  demanded  and 
always  will  demand  that  the  fruits  of  effort  shall  be 
enjoyed  by  the  person  making  the  effort  to  the  exclu- 
sion of  all  others. 

These  considerations  make  two  requisites  necessary  in 
whatever  may  be  used  as  a  medium  of  exchange. 

First,  the  reward  must  be  automatically  bestowed 
because,  if  it  is  under  the  control  of  any  person  or 
group,  the  judgment  and  desire  of  that  person  or  group 
will  dominate  the  community  and  will  result  in  in- 
justice and  also  in  the  supression  of  individual  effort 
and  individual  development.  Even  though  the  utmost 
honesty  and  unselfishness  is  used  in  exercising  the  con- 


THE  CONCLUSION  279 

trol  no  other  result  is  possible.  The  limitations  of 
human  nature  set  by  the  first  law,  self  preservation,  must 
give  this  result. 

Second,  whatever  is  used  as  such  medium  must  have 
the  confidence  of  the  community  in  order  to  have  value 
and  its  value  must  remain  constant.  Unless  the  value  of 
the  reward  of  effort  remains  stable  a  feeling  of  unrest 
and  uncertainty  will  menace  the  community.  The  only 
value  the  medium  of  exchange  has  is  its  exchange  value 
and  if  this  value  fluctuates  then  the  medium  is  valuable 
only  within  the  limits  of  the  fluctuation.  That  is,  the 
less  it  fluctuates  the  greater  its  value. 

If  the  dollar  received  today  buys  but  fifty  cents  worth 
a  month  or  a  year  from  today  the  reward  of  effort  will 
be  cut  in  half.  Such  an  occurrence  will  most  certainly 
create  dissatisfaction  and  uncertainty.  Business  calcu- 
lations will  be  upset,  unforeseen  losses  will  be  suffered 
and  a  constant  feeling  of  fear,  unrest  and  worry  will 
menace  the  community. 

The  defects  in  our  system  which  cause  these  unfavor- 
able phenomena  and  prevent  us  from  enjoying  personal 
liberty,  security  and  confidence  have  been  thoroughly 
explained  and  the  remedy  necessary  to  overcome  them 
has  been  clearly  set  forth.  Its  adoption  will  give  us  a 
medium  of  exchange  and  reward  of  effort  as  perfect  as 
any  human  institution  can  be  made. 

It  has  been  thoroughly  demonstrated  that  personal 
and  national  efficiency  and  well-being  depend  on  the  per- 
fection of  this  medium,  so  with  its  improvement  our 
personal  and  collective  prosperity,  comfort  and  happi- 
ness will  improve  in  like  degree. 


280  THE  STRANGLE  HOLD 

No  country  in  its  medium  of  exchange  has  ever  at- 
tained perfection  in  these  two  desiderata  of  elasticity 
and  safety  but  some  have  approached  it  in  a  greater  or 
less  degree.  It  has  been  shown  that  the  eflBciency, 
progress  and  well-being  of  the  various  countries  and 
peoples  have  always  been  in  direct  proportion  to  the 
nearness  of  this  approach. 

There  still  remains,  however,  one  point  which  should, 
in  justice  to  the  banker,  be  clearly  brought  out.  From 
what  has  been  said  it  may  be  thought  that  the  bankers 
are  in  some  degree  personally  responsible  for  our 
troubles,  since  they  are  in  control  of  the  medium  of 
exchange.     This,  however,  is  not  so. 

If  the  impression  exists  that  any  banker  is  in  any  way 
responsible  for  the  defects  in  our  present  financial  sys- 
tem or  that  he  can  be  held  accountable  for  our  present 
or  past  economic  ills  such  a  notion  should  be  dismissed. 

The  banker  is  a  victim  of  the  system  along  with  the 
rest  of  the  community. 

The  use  of  bank  credit  as  a  medium  of  exchange  was 
developed  because  industrial  growth  made  a  greater  de- 
mand for  an  exchange  medium  than  the  money  metals 
could  supply,  so  to  continue  to  use  metal  alone  would 
have  held  progress  in  a  vise  and  checked  development 
as  it  does  in  the  case  of  China. 

The  gold  standard,  or  the  use  of  gold  as  a  basis  for 
credit  has  become  increasingly  more  difficult  as  business 
and  credit  developed  but  it  has  been  the  only  method 
so  far  known  of  holding  public  confidence  in  bank  credit. 
It  would  never  have  been  possible  to  persuade  the  people 
to  deposit  their  funds  in  a  bank  had  they  not  supposed 


THE  CONCLUSION  281 

that  the  banker  kept  the  money  for  them  and  would 
hand  it  back  any  time  they  wanted  it.  Since  bank  de- 
posits make  it  possible  to  substitute  bank  credit  for 
money  a  complicated  sj'stera  of  reserve  requirements 
developed  for  the  purpose  of  continuing  this  illusion. 
An  expose  of  the  true  state  of  affairs,  even  a  few  years 
ago,  might  have  precipitated  a  panic,  for  our  system  at 
that  time  could  not  have  withstood  the  shock  of  the 
truth.  Now,  however,  with  all  financial  reform  striving 
to  arrive  at  the  point  which  this  book  shows  how  to  reach 
by  taking  another  short  step  in  the  same  direction  con- 
fidence will  be  increased  instead  of  diminished  by  discus- 
sion and  understanding.  One  conclusion  is  certain, 
since  our  exchange  system  is  the  result  of  evolution,  no 
banker  or  anyone  else,  at  the  present  time,  is  to  be 
censured  for  its  shortcomings. 

The  test  of  the  banker's  good  faith  and  understanding 
will  come  only  when  he  realizes  that  fiction  and  foibles 
have  outlived  their  day  of  usefulness  and  that  a  logical 
and  better  way  of  securing  public  confidence  is  neces- 
sary. When  the  slight  change  herein  suggested  is  fully 
understood,  it  will  be  realized  that  public  control  fur- 
nishes a  practical  method  of  putting  bank  credit  on  a 
safe  and  just  basis.  The  change  for  the  better,  from 
every  standpoint,  is  so  obvious  that  even  the  most  con- 
servative banker  will  hardly  attempt  to  argue  that  it  is 
not  an  improvement  on  the  present  system.  When  the 
suggested  change  is  understood,  the  practical  benefits 
which  will  accrue,  and  the  justice  of  the  arrangement  is 
so  apparent,  honest  objection  seems  impossible.  And, 
because  it  is  all  so  American  those  who  still  advocate 


282  THE  STRANGLE  HOLD 

clinging  to  the  status  quo  can  do  so  only  for  the  purpose 
of  perpetuating  their  present  power  and  privilege.  Such 
action  would  certainly  be  contrary  to  good  citizenship. 

In  the  proposed  remedy  there  is  not  the  least  sug- 
gestion of  a  change  in  our  money  or  methods  of  using 
it.  There  is  no  suggestion  of  change  in  business 
practice  or  methods  or  in  the  status  of  the  bank.  The 
only  suggestion  is  to  overcome  the  bankers'  authority 
to  dictate  the  use  of  the  medium  of  exchange  by  the 
same  means  and  for  the  same  reason  that  we  overcame 
the  private  control  of  the  medium  of  transportation — 
the  railroads.  It  suggests  applying  to  the  medium  of 
exchange  the  same  principle  of  public  control  which  was 
applied  to  the  medium  of  transportation  through  the 
Interstate  Commerce  Commission. 

The  proposed  change  does  not  even  suggest  that  the 
banker  give  up  his  power  without  compensation,  for  it 
is  proposed  to  give  the  banks  SAFETY  in  exchange 
for  POWER. 

By  putting  bank  credit  under  public  control  in  the 
manner  suggested  every  loan  any  bank  could  legally 
make  would  be  perfectly  safe.  This  end  must  be  ac- 
complished or  our  proposed  change  fails  in  its  primary 
object  which  is  to  secure  to  bank  credit  100%  public 
confidence. 

It  has  been  seen  that  the  suggested  plan  accomplishes 
this  purpose  because  it  prohibits  banks  from  lending 
more  than  a  safe  amount  on  any  security,  and  permits 
loans  only  on  securities  approved  by  the  people  them- 
selves. With  such  a  system  in  operation  no  bank  could 
possibly  make  a  bad  loan. 


THE  CONCLUSION  283 

Consequently,  a  great  weight  of  responsibility  would 
be  lifted  from  the  banker's  shoulders,  a  relief  which 
he  alone  can  appreciate. 

Under  our  present  system  the  banker  must  be  always 
on  guard  not  only  against  schemers  but  he  is  constantly 
being  asked  to  make  loans  to  social  or  business  associ- 
ates on  security  or  under  conditions  which  he  does  not 
fully  approve.  Sentiment  and  friendship,  however, 
prompt  him  to  make  many  such  loans.  This  yielding  to 
a  common  human  weakness  causes  worry  and  often 
brings  unfavorable  criticism  and  loss,  so  the  banker  is 
constantly  torn   between  sentiment  and  judgment. 

The  proposed  change  would  protect  all  bankers  from 
both  their  friends  and  their  enemies.  It  would  even 
do  away  with  the  necessity  for  good  judgment  on  their 
part  for  it  would,  by  confining  all  bank  loans  to  ap- 
proved security,  do  away  with  the  chance  for  loss. 

No  reason,  other  than  a  desire  to  retain  power,  is 
apparent  why  such  a  system  should  not  be  as  welcome 
to  the  bankers  as  to  the  rest  of  the  community. 

With  the  assurance  of  safety  which  public  control 
would  give,  the  people  would  have  100%  confidence  in 
the  bank.  In  that  case  there  would  never  be  a  demand 
made  on  any  bank  for  a  money  payment,  so  the  neces- 
sity for  a  reserve,  the  banker's  greatest  worry,  would 
be  removed. 

To  be  sure  money  would  be  used  just  as  it  is  used 
now  for  small  transactions  and  in  all  respects  it  would 
be  the  same  money  used  today.  The  only  difference 
would  be  that  instead  of  having  a  hazy  notion  that  money 
called   for   gold   it   would   be  known   that   it   called   for 


284  THE  STRANGLE  HOLD 

credit.  It  would  also  be  understood  that  the  federal 
reserve  note  was  simply  a  different  form  of  bank  credit 
and  the  delusion  that  it  represents  gold  would  no  longer 
exist. 

If  the  banker  did  not  happen  to  have  on  hand  all  the 
notes  desired  by  a  customer,  the  Federal  Reserve  Bank 
would  accept  any  piece  of  paper  in  any  bank  for  its 
discount  value  in  those  notes.  The  people  knowing  that 
money  could  always  be  had  would  never  call  for  it,  or 
use  it,  except  as  a  means  for  carrying  on  small  transac- 
tions where  it  would  be  inconvenient  to  draw  a  check. 

This  change  would  make  all  good  securities  bankable 
and  make  all  bank  credit  good  money. 

It  has  been  shown  that  the  only  reason  why  a  good 
security  is  not  at  present  always  bankable  is  either  be- 
cause the  banker  does  not  want  to  lend  to  the  person 
who  offers  it  or  because  it  is  not  a  liquid  security.  The 
reason  why  securities  must  be  liquid  now  is  because  the 
people,  lacking  confidence  in  the  bank,  may  wish  to 
draw  out  their  deposits  and,  consequently,  securities 
must  be  such  as  can  be  quickly  turned  into  money. 

Public  control  would  remove  both  of  these  reasons  so 
that  every  good  security  would  be  a  bankable  security. 
The  term  "liquid"  security  would  soon  be  obsolete.  All 
security  would  be  equally  liquid  and  equally  bankable. 

With  this  change  every  branch  of  industry  would  have 
the  same  access  to  the  use  of  the  medium  of  exchange. 

The  automobile  dealer  would  no  longer  be  excluded 
because  a  few  persons  happened  to  decide  that  he  was 
selling  a  luxury  which  ordinary  people  had  no  right  to 
enjoy. 


THE  CONCLUSION  285 

The  farmer  would  no  longer  be  a  financial  outcast 
because  his  occupation  does  not  permit  him  to  use  thirty, 
sixty  and  ninety  day  money.  The  bank  would  no  longer 
have  a  time  lock  on  it  against  the  farmer. 

The  exporter  could  extend  credit  to  any  length  of 
time  necessary  to  carry  his  trade  and  he  would  not  be 
under  the  necessity  of  robbing  his  customers  through 
the  fall  in  the  value  of  foreign  exchange  or  of  driving 
business  away  because  of  lack  of  credit  facility. 

Credit  could  be  extended  to  any  length  as  far  as  both 
time  and  amount  are  concerned.  The  only  requisite 
would  be  sufficient  security.  As  long  as  the  security 
was  good  and  the  interest  paid  there  would  be  no  limit 
of  time  nor  amount  and  no  other  consideration.  There 
would  be  no  control  except  the  demands  of  business. 

Every  man  would  be  enabled  to  stand  on  his  own  feet, 
use  his  own  judgment  and  conduct  his  o\vn  business  as 
he  saw  fit,  without  fear  or  favor.  All  legitimate  enter- 
prises would  be  readily  financed  because  there  would  be 
no  limit  to  the  medium  of  exchange.  Prosperity  would 
not  kill  prosperity  by  causing  a  blockade  of  credits 
against  the  reserve  requirement.  There  would  be  no 
freezing  point  for  credit,  so  the  wheels  of  industry  would 
not  be  stopped  by  "Frozen  Credits."  Business  would 
be  always  on  the  increase  due  to  a  constant  demand 
caused  by  a  continued  rise  in  the  living  standard.  There 
could  be  no  "Buyers'  strike"  for  desire  is  never  satis- 
fied so  long  as  the  means  of  turning  desire  into  demand 
can  be  had.  We  would  then  have  "normalcy"  and  our 
normal  conditions  would  be  one  of  peace  and  happiness. 
Science   would   advance,    the    arts    be    encouraged   and 


286  THE  STRANGLE  HOLD 

through  a  general,  continued  prosperity  civilization 
would  be  extended  to  the  utmost. 

The  flaw  in  our  system  which  prevents  the  accomplish- 
ment of  these  desired  ends  has  heretofore  been  hidden  by 
the  bad  symptoms  which  it  produced. 

For  instance,  the  most  recent  bugaboo,  the  H.  C.  L. 
has  been  shown  to  be  due  to  a  fluctuation  in  the  value 
of  the  dollar.  It  is  this  fluctuation  which  causes  the 
disparity  between  income  and  the  size  of  the  grocery 
bill,  butcher  bill,  the  cost  of  clothing  and  the  rent. 

If  the  fluctuation  in  the  value  of  the  dollar  were 
stopped,  industrial  turmoil  would  stop,  and  the  con- 
tinued friction  between  capital  and  labor  would  be  re- 
moved. The  bridging  of  this  chasm  would  surely  be  a 
great  relief  to  industry  and  to  society  generally. 

The  value  of  all  property  and  the  price  of  commodities 
would  be  stable,  varying  only  with  the  demand  for  and 
the  supply  of  various  properties  and  goods.  Business 
could  then  be  conducted  with  much  more  certainty  and 
success  would  depend  more  on  efficiency  than  on  chance 
and  not  at  all  on  the  banker's  favor. 

A  farmer  would  not  plant  and  harvest  a  crop  with 
dollars  worth  only  fifty  cents  and  be  compelled  to  sell 
his  crop  for  dollars  worth  one  hundred  cents  due  to  the 
fact  that  during  the  summer  the  banks  had  shut  down  on 
credit.  That  is,  he  would  not  have  to  pay  two  dollars 
for  everything  he  bought  in  the  spring  and  receive  but 
one  dollar  when  he  sold  in  the  fall.  He  would  then  sell 
his  crop  for  the  same  sized  dollars  that  he  spent  for 
plowing,  planting  and  harvesting.  The  changing  value 
of  the  dollar  between  the  spring  and  the  fall  of  1920 


THE  CONCLUSION  287 

caused  the  price  of  farm  products  to  shrink  from  one- 
third  to  one-half  and  even  more. 

If  a  thief  stole  from  the  farmer  one-third  to  one-half 
of  his  crop  the  v/hole  country  side  would  be  out  to  run 
him  to  earth  and  jail  him.  The  object  for  so  doing  would 
be  twofold.  First,  to  keep  the  thief  from  robbing  others 
and  second,  to  correct  the  error  of  his  ways.  Since  the 
banking  interests  did  that  very  thing  to  the  agricultural 
interests,  when  they  "deflated"  the  medium  of  exchange 
between  planting  time  and  marketing  time,  would  it  not 
be  wise  to  stop  them  from  further  marauding  by  correct- 
ing their  ways  of  doing  business  ? 

Even  the  most  complacent  "stand  patter"  will  hardly 
have  the  nerve  to  suggest  "over  production"  as  a  reason 
for  the  recent  fall  in  prices  when  half  the  world  is  in 
want.  The  fall  in  prices  for  most  agricultural  products 
during  the  summer  and  autumn  of  1920  was  due  entirely 
to  the  weakness  in  our  financial  sj'stem.  All  such  un- 
certainty, worry  and  loss  could  be  done  away  with  by 
putting  into  effect  the  remedy  here  given.  Such  an 
accomplishment  is  surely  sufficient  to  fully  justify  the 
change  even  if  there  were  no  other  advantages  to  be 
gained.  However,  let  us  examine  a  problem  which 
caused  much  comment  before  the  war  and  which  is 
still  the  object  of  legislation  and  of  court  action.  We 
refer  to  the  trusts. 

There  is  the  "Beef  Trust"  and  the  "Coal  Trust"  and 
the  "Steel  Trust"  and  numerous  other  trusts.  For  the 
last  quarter  of  a  century  the  word  trust  with  a  more  or 
less  indefinite  meaning  has  been  made  the  scapegoat  for 
all  our  economic  ills.     They  are  supposed  to  be  both 


288  THE  STRANGLE  HOLD 

father  and  mother  to  all  the  imaginary  evils,  such  as  the 
"H.  C.  L."  and  others. 

When  prices  go  up  the  ire  of  consumers  is  directed 
against  "the  trusts"  and  when  prices  go  down  the  pro- 
ducers' wrath  is  directed  against  the  same  "trusts."  This 
railing  against  "trusts'  has  gone  on  until  now  the  word 
has  come  to  be  used  as  an  epithet  to  describe,  or  rather 
to  locate  in  a  general  way,  what  the  user  considers  to 
be  the  cause  of  unsatisfactory  economic  conditions  which 
he  does  not  clearly  understand. 

Originally  the  word  trust  meant  a  business  organiza- 
tion or  an  aggregation  of  business  interests  associated  or 
consolidated  for  business  purposes. 

So  described,  the  trust  is,  not  only  an  outgrowth  of 
human  progress  but  it  is  an  expression  of  advancing 
civilization  because  it  co-ordinates  effort  and  reduces 
waste.  With  this  object  in  view  it  is  the  hope  of  the 
future  for  it  will  increase  efficiency  and  thus  advance 
civilization. 

The  evils  charged  to  the  trusts  and  the  oppression 
which  they  no  doubt  have  exerted  is  not  the  fault  of  the 
trust,  but  arises  from  the  fact  that  those  who  control 
them  also  control  the  medium  of  exchange  and  by  exert- 
ing their  power  over  credit  they  naturally  chill  and 
check  all  enterprise  not  tributary  to  the  trusts  they  con- 
trol. In  this  way  selfish  interests  curtail  the  produc- 
ing power  of  the  nation  and  this  gives  to  the  trusts  a 
control  over  production  and  prices  which  they,  by  them- 
selves, never  could  expect  nor  maintain. 

No  man,  nor  set  of  men,  could  monopolize  the  sources 
of  production,  that  is,  the  raw  material  and  at  the  same 


THE  CONCLUSION  289 

time  command  the  skill  and  labor  necessary  for  efficient 
production,  except  through  the  control  of  a  great  public 
utility  such  as  the  railroad  or  the  medium  of  exchange. 
We  recognized  this  power  in  the  case  of  the  railroads 
and  we  thought  we  had  overcome  the  difficulty  when  we 
put  them  under  public  control  but  it  is  quite  evident  now 
that  we  did  not  reach  the  real  cause  of  the  trouble. 

It  is  readily  seen  that  the  trust,  in  itself,  has  no  ad- 
vantage in  commercial  competition  unless  it  improves  on 
methods  of  production  or  marketing.  Its  apparent 
power  is  wholly  extrinsic,  and  is  due  entirely  to  money 
control  not  trust  control. 

This  power  of  money  is  the  prerogative  of  but  one 
trust — the  "Money  Trust,"  which  we  have  seen  is  neither 
more  nor  less  than  our  banking  system.  The  fact  that 
those  who  control  the  trusts  also  control  the  banking  sys- 
tem is  so  notorious  that  we  need  scarcely  call  attention 
to  it. 

When  through  public  control  we  give  to  all,  an  equal 
right  to  use  the  medium  of  exchange  the  "Money  Trust" 
will  loose  its  power  and  all  trusts  will  then  appear  in 
their  true  light.  They  will  appear  no  longer  as  bogies 
or  scapegoats  but  merely  as  combinations  of  interests  for 
improvement  in  production  and  the  advancement  of  trade. 
Advantage  can  then  be  gained  only  by  reducing  cost  and 
when  a  saving  is  made  in  production  or  distribution  the 
whole  community  profits  because  it  is  the  object  of  civil- 
ization to  supply  man's  wants  with  the  least  effort.  If 
the  trust  does  not  succeed  in  reducing  cost  the  combina- 
tion will  have  failed  in  its  object  and  will  disappear. 

There  is  another  important  improvement  that  will  fol- 


290  THE  STRANGLE  HOLD 

low  public  control  which  has  not  been  noted  and  which 
will  not  be  understood  without  considerable  thought.  It 
is  not  quite  so  apparent  as  other  benefits  but  it  will  never- 
theless be  most  welcome.  This  is  the  betterment  which 
would  come  about  by  changing  the  motive  which  now 
prompts  men  to  accumulate  great  wealth. 

Starting  out^  of  course,  men  strive  to  obtain  the  nec- 
essaries of  life,  then  the  comforts  and  then  the  luxuries. 
But  when  all  these  are  assured  by  the  accumulation  of  a 
great  fortune  why  do  men  still  strive  for  gain .'' 

There  can  be  but  one  reason,  other  than  force  of 
habit,  and  that  is,  men  love  power  and  the  control  of 
money  under  our  present  system  gives  it  to  them. 

After  accumulating  a  fortune,  which  assures  to  the 
owner  and  his  family  all  the  comforts  and  luxuries  of  life, 
a  man  will  continue  working  and  accumulating  because 
of  an  instinctive  love  to  dominate  his  fellow  men. 

Under  our  present  political  form  of  government  it  is 
only  through  the  control  of  money  that  man  can  gratify 
this  desire. 

To  limit  by  law  the  amount  any  man  may  accumulate 
or  own,  would  result  only  in  harm  for  it  would  put  a  limit 
to  enterprise  and  would  unnecessarily  interfere  with 
personal  liberty,  therefore,  such  action  should  be  avoided. 

Public  control  of  the  medium  of  exchange  accom- 
plishes the  same  object  without  destroying  initiative,  for 
when  all  are  permitted  to  use  the  medium  of  exchange 
on  the  same  terms  the  power  of  money  will  be  destroyed. 
By  divesting  money  of  its  power  incentive  to  accumulate 
beyond  the  point  where  comforts  and  luxuries  are  assured 
would  be  removed. 


THE  CONCLUSION  291 

Money,  the  medium  of  exchange,  holds  its  power  only 
because  private  persons  control  the  money  function 
through  controlling  bank,  credit  and,  therefore,  can  deny 
its  use. 

This  money  power  exerts  control  in  exactly  the  same 
way  as  the  railroads  formerly  did  or  as  any  other  pub- 
lic utility  would  in  proportion  to  its  importance.  Any 
facility  which  must  be  used  by  all  the  members  of  the 
community  would  give  to  those  who  could  control 
such  a  facility  power  over  the  community.  Bank  credit  is 
such  a  facility,  for  it  is  our  medium  for  carrying  on 
trade  and  all  must  use  it  to  make  a  living,  so  its  control 
gives  power.  But,  wlicn  the  private  control  of  that  me- 
dium is  overcome  by  permitting  all  to  use  it  on  the  same 
terms,  the  "power  of  money"  will  be  destroyed. 

The  homage  which  is  paid  to  wealtli  today  comes 
from  a  mistaken  idea  that  the  power  of  money  is  due  to 
wealth.  Therefore,  a  natural  thirst  for  power  and  pres- 
tige induces  men  to  accumulate  wealth  beyond  their  needs 
only  for  the  purpose  of  gratifying  a  common  human 
weakness. 

In  this  connection,  the  terms  wealth  and  money  must 
not  be  confounded  nor  misunderstood.  Let  us  define 
wealth  as  any  piece  of  property  of  value  such  as  a 
building,  a  piece  of  land  or  a  quantity  of  merchandise. 
It  is  quite  evident  that  nothing  of  that  kind  can  exert 
power  because  none  of  us  arc  compelled  to  use  any  par- 
ticular building,  piece  of  land  or  certain  lot  of  merchan- 
dise. If  we  cannot  secure  what  we  want  at  our  price  we 
can  do  without  it,  we  can  use  somctliing  else. 

But,  if  money  is  defined  as  tlic  medium  of  exchange. 


292  THE  STRANGLE  HOLD 

it  is  a  very  different  story  for  we  must  all  use  that. 

We  cannot  produce  the  things  necessary  for  life  nor 
carry  on  business  without  using  the  medium  of  ex- 
change. In  fact  its  use  is  much  more  necessary  in  the 
every  day  affairs  of  the  community  than  the  railroad  or 
any  other  facility.  No  exchange  of  goods  or  of  services 
can  take  place  without  it,  so  to  keep  it  from  controlling 
us  we  must  make  its  use  a  right. 

As  long  as  the  use  of  it  is  a  privilege  which  can  be 
denied  we  give  to  those  who  control  it  a  most  complete 
power  over  us.  Since  the  medium  of  exchange  is  almost 
as  essential  to  industry  as  air  and  water  are  to  physical 
existence,  the  power  which  controls  it  has  practically 
supreme  control  over  the  community. 

We  see,  therefore,  that  wealth  has  no  power  be- 
cause we  are  not  compelled  to  use  any  certain  piece  of 
wealth,  but  the  medium  of  exchange  has  because  we 
are  all  compelled  to  use  it.  The  power  of  money  arises 
from  the  fact  that  its  use,  while  necessary,  can  be  denied. 
It  is  plain,  therefore,  that  if  our  exchange  system  were 
so  arranged  that  the  use  of  the  medium  could  not  be 
denied,  that  is,  so  that  all  could  use  it  on  the  same  terms, 
the  power  and  prestige  of  money  would  be  overcome. 

Up  to  the  point  of  supplying  our  wants,  efforts  to 
acquire  wealth  are  spurred  by  a  desire  to  better  our  con- 
dition, or  in  other  words,  to  raise  our  living  standard. 
This  ambition  should  be  encouraged  but  beyond  the 
point  of  satisfaction  of  desire  it  is  merely  the  love  of 
money  for  the  power  it  gives  that  induces  the  effort  to 
accumulate. 

It  is  evident  then  that  if  power  is  taken  from  money. 


THE  CONCLUSION  293 

avarice,  which  is  the  love  of  money  for  money's  sake,  will 
be  destroyed.  With  its  power  gone  neither  money  nor 
wealth  from  which  its  power  is  supposed  to  spring  would 
command  homage  nor  cause  envy  and  class  hatred. 

Without  power,  money  would  be  merely  a  commercial 
tool  and  there  would  be  no  object  in  piling  it  up  any 
more  than  there  would  be  in  gathering  up  a  hundred 
hammers  when  one  hammer  would  do  the  work. 

Such  a  condition  would  bring  about  many  improve- 
ments in  our  social  as  well  as  in  our  industrial  life.  The 
homage  now  paid  to  wealth  would  disappear.  Property 
would  be  accumulated  only  to  satisfy  an  ambition  to  live 
well.  When  a  sufficient  income  was  secured  to  assure 
the  satisfaction  of  desire,  the  accumulation  would  cease 
for  there  would  be  no  object  gained  or  purpose  served 
in  accumulating  more. 

Industrially,  public  control  would  open  the  door  of  the 
bank  to  all  branches  of  industry  and  remove  the  present 
restraint  on  production  and  trade.  Efficiency  and  square 
dealing  would  replace  favoritism  and  chance  in  business. 

Aside  from  the  industrial  and  social  advantages  to  be 
gained  by  public  control  of  bank  credit  there  is  yet  an- 
other advantage  not  to  be  lightly  considered.  That  is,  the 
improvement  in  moral  standards  which  would  follow  the 
change  of  the  basis  for  bank  credit  from  the  false  prom- 
ise of  gold  redemption  to  one  of  real  security  and  truth. 

That  our  present  system  of  credit  rests  on  a  false 
promise,  that  of  gold  redemption,  covered  by  a  smoke 
screen  of  reserve  deception,  cannot  be  denied.  Such  a 
condition  certainly  is  not  conducive  to  good  faith  and 
integrity  in  any  of  our  dealings.    But,  when  the  founda- 


294,  THE  STRANGLE  HOLD 

tion  of  our  greatest  public  utility  is  changed  to  one  of 
truth  and  honesty  as  suggested^  then  honor  instead  of 
cupidity  will  be  at  a  premium. 

When  the  bank's  power  is  destroyed,  as  the  railroad's 
power  was,  push  will  displace  pull  as  the  requisite  for 
business  success  and  the  man  instead  of  the  courtier  will 
win. 

VvTien  the  suggested  change  is  adopted  the  financial 
system  will  enable  every  man  to  stand  on  his  own  feet 
and  will  grant  him  success  according  to  his  own  efforts. 

The  citation  of  existing  evils,  which  would  disappear 
and  of  improvements  in  our  industrial,  social  and  moral 
status  which  would  folloAV  from  the  proposed  change  in 
the  financial  system,  could  be  carried  to  indefinite  lengths. 
However,  enough  has  been  said  to  thoroughly  establish 
the  fact  that  all  members  of  the  community  would  be 
benefited  and  no  one  would  be  injured  by  the  change. 

In  the  proposed  remedy  there  is  no  suggestion  which 
is  not  clearly  and  directly  in  line  with  American  prin- 
ciples, ideals  and  experience,  and  also  in  direct  line  with 
financial  evolution  and  development.  It  is  but  one  more 
step  in  advance  along  the  same  highway  of  progress 
which  civilization  has  followed  from  the  beginning. 

However,  in  order  to  forestall  the  usual  cry  of  "rad- 
ical" the  fact  should  be  clearly  noted  that  the  only 
change  suggested  herein  is  to  extend  our  well  estab- 
lished principles  of  public  control  of  public  utilitiss  to 
include  the  medium  of  exchange.  Experience  has  taught 
the  American  people  that  public  control  of  public  util- 
ities is  necessary  in  order  to  put  into  practice  the  prin- 
ciples of  liberty  and  equality  on  which  our  nation  was 


THE  CONCLUSION  295 

founded.  Consequently,  when  it  is  definitely  established 
that  the  medium  of  exchange  is  a  public  utility,  one  can- 
not oppose  the  suggestion  of  public  control  for  it  and 
still  be  considered  a  good  citizen. 

On  the  contrary,  it  becomes  the  patriotic  duty  of  every 
good  American  to  spare  no  effort  to  secure  this  change 
for  it  is  necessary  in  order  to  realize  the  principles  of 
liberty  and  equality  which  the  American  people  have 
proclaimed  to  the  world  as  being  the  foundation  of  their 
government. 


APPENDIX 

Appended  are  verbatim  copies  of  official  documents 
furnished  by  the  Comptroller  of  the  Currency.  They 
speak  for  themselves  and  supplement  and  support  the 
text.  The  facts  set  forth  in  these  documents  are  quite 
startling  to  those  unacquainted  with  "Wall  Street"  and 
as  they  are  based  on  the  statements  of  the  banks  them- 
selves they  should  be  carefully  read. 


NOTE 


The  side  notes  are  intended  to  call  attention  to  the 
points  where  these  official  documents  supplement  the 
statements  made  in  this  book.  After  reading  the  ap- 
pendix a  review  of  the  chapter  on  the  "Federal  Reserve" 
and  those  following  it  will  convince  any  reasonable  per- 
son that  a  revision  of  our  exchange  system  is  necessary 
and  a  review  of  Chapters  VII  and  VIII  will  show  that 
the  remedy  suggested  here  is  practical  and  complete. 


296 


FOR  THE  PRESS 

OFFICE  OF  COMPTROLLER  OF  CURRENCY 

The  Comptroller  of  the  Currency  said  today: 

NEW  YORK  CALL  MONEY  RATES  HIGHEST  IN 
THE  WORLD 

Unjustifiable  Interest  Exacted  on  Demand  Loans  Ag- 
gregating Billions  an  Active  Contributing  Cause  of 
Exorbitant  Rates  for  New  Capital  Charged  Cities, 
Railroads,  Industrial  and  Other  Public  and  Private 
Enterprises  and  for  the  Huge  Shrinkage  During  the 
Past  Year  in  All  Security  Values. 


"Renewal"  Rates  Fixed  Daily  by  Small  "Coterie"  of 
Stock  Exchange  Brokers  Govern  Interest  Charged  on 
Brokers  Loans  in  Nearly  All  New  York  Banlis, 


In  a  statement  given  to  the  press  on  July  31,  1920, 
I  expressed  the  opinion  that  there  was  no  justification 
for  the  excessive  and  burdensome  interest  rates  "running 
up  to  ten,  twelve  and  fifteen  per  cent  and  higher,  which 
had  been  exacted  by  some  of  the  banks  in  New  York 
City,  the  principal  financial  center  of  our  country." 

It  is  no  part  of  my  business  to  discuss  now  the  moral- 
ity or  the  ethics  of  these  transactions.  It  is  my  imper- 
ative duty  to  take  close  cognizance  of  them  so  far  as 
they  may  have  effect  on  the  general  banking  and  com- 

297 


298  THE  STRANGLE  HOLD 

mercial  interest  of  the  country.  I  realize  clearly  the  in- 
estimable and  indisputable  value  to  our  own  country  and 
WALL  the  world  of  the  great  money  center  popularly  known  as 
STREET  "Wall  Street;"  and  have  no  purpose  or  wish  to  stir  prej- 
udice against  it,  or  to  do  or  say  anything  to  impair  its 
usefulness  or  to  injure  any  institution  or  individual  con- 
nected with  its  activities.  I  do  intend,  strictly  in  the  line 
of  official  duty,  to  put  before  the  public  and  the  news- 
papers facts  of  which  both  are  uninformed  and  to  point 
out  evils  already  existing  and  dangers  threatened  be- 
cause of  those  facts. 

In  the  statement  of  July  31st,  I  called  attention  to 
the  fact  that  New  York  was  the  only  city  of  conse- 
quence in  the  world  where  such  interest  rates  existed  or 
are  tolerated  and  I  expressed  the  belief  that  the  exac- 
tion of  these  rates,  the  publicity  given  them,  had  in- 
creased the  uneasiness  in  financial  circles  and  had  been 
an  active  contributing  factor  rather  than  a  consequence, 
EVILS  OF  in  the  unsettling  of  security  values,  and  that  they  had 
USURY  operated  to  force  railroads  and  industrial  corporations 
to  pay  burdensome  and  costly  rates  in  providing  fresh 
capital  for  the  industries  and  business  of  the  country. 
I  also  pointed  out  that  the  banks  which  had  been  charg- 
ing their  customers  these  excessive  rates 

"at  times  as  high  as  fifteen  per  cent  or  more  have 
themselves  at  the  same  time  been  liberally  accommo- 
dated with  millions  of  dollars  by  the  Federal  Reserve 
Banks  at  average  rates  of  considerably  less  than  six 
per  cent." 

This  press  statement  was  vigorously  attacked  in  the 
columns  of  the  New  York  papers  in  interviews  with  vari- 


APPENDIX  299 

ous  anonymous  bankers  and  financiers  •who  refused^  how- 
ever, to  permit  their  names  to  be  used.  One  leading  jour- 
nal, for  example,  quoted  bankers  as  saying: 

"It  is  unfair  to  attempt  to  defame  the  whole  New 
York  banking  community  just  because  of  one  or  two 
possible  insignificant  instances  of  abuse." 

Another  leading  New  York  paper  declared  that  the 
high  rates  quoted  on  the  Stock  Exchange  applied  only  to 

"a  small  amount  of  money  relatively  speaking." 

The  investigation  which  I  have  made  since  my  public 
statement  on  this  subject  completely  confirms  the  views 
expressed  and  proves  that  they  were,  if  anything,  too 
conservative. 

In  order  that  the  public  might  be  fully  informed,  and 
know  the  exact  facts  in  regard  to  the  money  situation 
in  New  York,  the  national  banks  in  New  York  City  were 
requested  by  the  Comptroller  of  the  Currency,  under  date 
of  August  5,  1920,  to  furnish,  under  oath,  a  report  of  banks 
the  number  and  amount  of  all  demand  loans  secured  by  convict 
bonds  and  stocks  made  monthly  by  them  between  Octo-  them- 

SFLVES 

ber  1,  1919,  and  July  31,  1920,  upon  which  they  had 
exacted  interest  in  excess  of  six  per  cent  per  annum.  The 
banks  generally,  including  the  largest  bank  in  New  York 
City,  complied  with  the  request,  but  three  banks  de- 
murred, claiming  that  it  would  be  impracticable  for  them 
to  furnish  the  data  called  for  as  to  various  loans  made 
by  them  at  excessive  interest  rates  by  months  as  re- 
quested. They  were,  thereupon,  requested  to  furnish  in- 
formation as  to  the  loans  made  by  them  for  about  eight 
days  in  each  month  since  October  1,  1919,  these  eight 
days  including,  generally,  the  high  money  periods  in  each 


300  THE  STRANGLE  HOLD 

month.  It  should  be  understood^  therefore,  that  in  the 
statement  which  follows,  three  of  the  larger  banks  have 
included  only  a  portion^  and  not  all,  of  their  loans  made 
at  the  high  rates. 

The  banks  were  requested,  in  submitting  their  state- 
ments, to  count  as  a  new  loan  each  change  in  the  in- 
terest rate  on  their  existing  call  loans.  If  a  loan,  for 
example,  should  be  made  for  $100,000  to  a  brokerage 
firm  by  a  certain  bank  at  10%,  and  the  rate  changed 
five  times  in  30  da3'^s,  this  loan  would  be  regarded  as  six 
loans  with  an  aggregate  of  $600,000.  Therefore,  these 
demand  loans  embraced  in  this  statement  should  be  con- 
sidered as  running  from  one  day  upwards.  It  should  also 
be  explained  that,  in  the  case  of  one  of  the  three  banks 
which  reported  its  loans  for  only  a  portion  of  the  period, 
call  loans  are  included  which  were  made  by  this  one 
bank  for  outside  banks  as  well  as  for  itself.  These  out- 
side loans  sometimes  amounted  to  more  and  sometimes  to 
less  than  the  call  loans  made  by  the  bank  for  its  own 
account. 

The  sworn  reports  to  this  office  show  that  during  the 
period  from  October,  1919,  to  August  1,  1920,  there 
were  made  by  the  national  banks  in  New  York  City  more 
than  4,000  loans,  at  rates  of  15%,  20%,  25%  and  30% 
per  annum,  and  that  the  amoimt  of  these  loans,  including 
only  a  portion  of  those  made  during  this  period  at  the 
above  rates  in  three  of  the  largest  banks,  aggregated 
over  Six  Hundred  Million  Dollars  ($600,000,000). 

The  records  also  show  that  the  total  loans  outstand- 
ing upon  which  interest  at  15  to  30  per  cent  was  being 
charged  by  a  portion   of  these  banks   on   42   different 


APPENDIX  301 

days,  for  which  reports  were  received  from  them,  aggre- 
gated over  $1,100,000,000.  It  will  be  remembered  that 
in  my  statement  of  July  31,  the  banks  were  charged  with 
making  loans  at  "10%,  12%  and  15%."  The  actual 
facts,  therefore,  in  view  of  the  loans  made  at  15%,  20% 
and  30%  indicate  that  my  statement  was  extremely  con- 
servative. 

The  records  also  show  that  the  amount  of  loans  made   the 
during  the  same  period  at  rates  in  excess  of  10%   and    confession 
up  to  but  not  including  15%  amounted  to  over  $1,400,- 
000,000,  there  being  over  11,000  of  such  loans. 

In  addition  to  the  above  the  aggregate  of  the  loans 
upon  which  a  portion  of  the  banks  reported  that  they 
were  charging,  on  81  different  days,  interest  in  excess 
of  10%,  and  up  to  but  not  including  15%,  was  about 
$900,000,000.  The  "brokers"  or  "Street"  loans  upon 
which  the  New  York  banks,  during  the  period  referred 
to,  were  charging  MORE  THAN  eight  per  cent  per 
annum  and  up  to  10%,  reach,  in  the  aggregate,  some 
billions  of  dollars  additional  in  amount  and  tens  of  thou- 
sands in  number. 

It  should  be  understood  that  these  loans  (except  in  the 
case  of  one  bank)  represent  the  money  loaned  by  the 
banks  for  their  own  account,  and  the  figures  do  not  in- 
clude the  loans  made  for  tlicir  correspondent  banks. 

As  a  result  of  persistent  inquiries  among  the  banks,   "call 
brokers    and    stock    exchange   authorities,   tliis    office    is   money 
now,  for  the  first  time,  able  to  inform  the  public  as  to 
how  the  so-called  "renewal"  rate  is  made  from  day  to 
day  in  the  New  York  Call  ISIoney  Market,  and  the  extent 
to  which  this  money  rate  is  observed  by  the  New  York 


802  THE  STRANGLE  HOLD 

banks  in  making  their  charges  on  ordinary  Wall  Street 
or  brokers'  loans. 

Under  the  New  York  banking  law,  it  is  lawful  for  a 
lender  to  charge  any  rate  of  interest  which  may  be  agreed 
upon  with  the  borrower  on  a  demand  loan  for  $5,000  or 
more  secured  by  stocks,  bonds  or  other  securities.  This 
provision  of  the  New  York  Statute  enables  lenders  to 
escape  penalties  for  usury  which  exist  in  most  of  the 
other  States. 
THE  "pump  From  information  furnished  this  office,  through  difFer- 
HANDLE  ent  sources,  it  appears  that  every  business  day  a  coterie 
of  brokers,  members  of  the  New  York  Stock  Exchange, 
get  together  for  consultation  on  the  floor  of  the  Ex- 
change, or  by  telephone,  and  determine  what,  in  its  view, 
is  the  proper  rate  for  the  renewal  of  all  street  or  brok- 
ers' call  loans  for  that  day.  As  soon  as  the  rate  is  agreed 
upon  the  President  of  the  Stock  Exchange  is  notified, 
and  the  rate  is  posted  on  the  floor  of  the  Stock  Exchange 
at,  say,  11  o'clock. 
RATE  ON  This  rate  is  then  sent  over  the  "ticker"  to  all  the  banks 
BROKER  s  jj^  New  York  City  and  these  banks  thereupon  mark  up 
or  down,  as  the  case  may  be,  the  rate  of  interest  upon 
practically  all  their  Wall  Street  or  so-called  brokers' 
loans.  Some  banks  take  the  precaution  to  notify  their  cus- 
tomers by  card,  sent  by  mail  or  otherwise  of  the  change 
in  interest  rate  on  their  loans,  while  other  banks  do  not. 
They  claim  that  the  posting  of  the  renewal  rate  on  the 
floor  of  the  Stock  Exchange  serves  automatically  to  raise 
or  lower  the  rate  of  interest  on  this  character  of  loans, 
held  by  all  the  New  York  banks,  for  themselves  or  their 
out   of   town   correspondents,    and   their   customers    are 


LOANS 


APPENDIX  303 

charged  the  rate  so  posted,  unless  they  make  special 
arrangements  with  the  bank  to  the  contrary,  or  pay  the 
loan. 

In  the  questionnaire  sent  by  the  Comptroller  of  the 
Currency  to  all  the  national  banks  under  date  of  August 
5,  1920,  each  bank  was  asked  the  following  question: 

"Has  it  been  the  practice  of  your  bank,  during  the 
past  six  montlis,  to  mark  up  or  down,  from  day  to  day, 
according  to  the  fluctuations  of  the  New  York  Call 
Money  Market,  the  interest  rates  on  demand  or  call 
loans,  secured  by  bonds  or  stocks,  made  to  borrowers 
who  are  not  depositors  in  your  bank?" 

In  reply  to  that  question  every  National  Bank  in  New   banks 
York  City  with  two  or  three  exceptions  answered  "Yes,"   plead 
and  two  of  these  stated  that  they  too,  under  certain  con-   guilty 
ditions  also  charged  the  "call  money"  rate. 

It  is  fair  to  say,  however,  that  nearly  all  of  these 
banks  with  a  few  prominent  exceptions  stated  that  it  had 
not  been  customary  with  them,  in  making  advances  in 
rates,  to  increase  the  rates  on  demand  or  call  loans  made 
to  their  own  regular  customers  who  kept  deposit  accounts 
with  their  banks  and  that  these  regular  customers  were 
treated  differently  from  the  ordinary  brokers  or  Wall 
Street  borrowers.  It  is  also  wortliy  of  note  that  demand 
loans,  secu:  d  by  stocks  and  bonds,  made  by  banks  to 
their  own  officers  and  to  tlie  officers  of  otlicr  banks  are  favor- 
also  generally  exempted  from  the  high  interest  rates.  itism 

It  is  also  fair  to  state  that  the  reports  in  this  office 
show  that  despite  the  huge  volume  of  loans  made  at  fancy 
rates,  less  than  one-half  of  the  National  Banks  in  New 
York   City   reported   that   the   demand    loans   made    for 


S04  THE  STRANGLE  HOLD 

their  own  accounts  at  rates  of  15%  or  more,  aggregated 
for  each  bank  over  ten  million  dollars  between  October 
1,  1919,  and  July  31,  1920. 

In  their  reports  to  this  office  of  September  8,  1920, 
the  national  banks  of  New  York  City  reported  that  they 
were  lending  07i  demand,  on  bond  and  stock  collateral 
over  $348,000,000. 

The  national  banks  in  New  York  City  also  reported 
that  on  August  1,  1920,  the  amount  of  money  which  they 
"were  loaning  on  demand,  on  bond  and  stock  collateral,  in 
New  York  City  for  account  of  customers  and  corre- 
spondents was  $524,000,000. 

It  is  fair  to  assume  that  the  Trust  Companies  and 
State  Banks  in  New  York  City  were  lending  demand 
on  stocks  and  bonds  as  much  as  the  National  Banks. 

The  Stock  Exchange  authorities  state  that  the  post- 
ing of  the  "renewal"  rate  on  the  floor  of  the  Stock  Ex- 
change does  not  make  it  compulsory  with  the  banks  to 
charge  such  "renewal"  rate.  Attention,  however,  must 
be  called  to  the  fact  that  nearly  every  National  Bank  in 
New  York  City  has  admitted  that  when  the  rate  is 
posted,  the  rates  charged  on  "brokers"  or  "street"  loans 
are  changed  to  conform  to  the  prevailing  Call  Money 
Rate  and  the  only  alternative  for  a  borrower  is  to  pay 
his  loan  or  be  charged  the  posted  or  current  rate.  As 
nearly  every  bank  in  New  York  charges  the  so-called 
"renewal"  rate  on  what  are  known  as  Wall  Street  or 
THE  "brokers"  loans,  it  would  be  vain,  obviously,  for  bor- 
STRANGLE  rowcr  to  hopc  to  obtain  the  money  in  New  York  at  a 
HOLD   lower  rate  by  shifting  his  loan  to  some  other  bank. 

Despite  the  statement  of  the  banks  generally  that  the 


INATION 
PROVED 


APPENDIX  305 

interest  rates  on  brokers'  loans  are  raised  or  lowered  sim- 
ultaneously with  the  fluctuations  in  the  New  York  Call 
Money  Market,  many  instances  of  apparent  discrimina- 
tion were  developed  which  show  wide  differences  in  the  discrim 
rates  charged  on  demand  loans  equally  well  secured.  For 
example,  when  the  "renewal"  rate  for  a  certain  day 
within  the  last  twelve  months  was  posted,  on  the  Stock 
Exchange  at  16%  the  report  of  one  particular  New 
York  bank  showed  that  on  that  date  this  Ijank  was 
charging  on  loans  for  itself  and  correspondents: 

7%   on  $4,900,00 

87o,97o,  11%  and  15%  on  $1,428,000 
18%   on  $750,000 
20%  on  $42,100,000 
25%   on  $3,550,000 
30%  on  $900,000. 

The  coterie  of  brokers  who  fix  the  "renewal"  rate,  insiders 
which  appears  to  have  such  binding  force  upon  the  banks 
in  New  York  City  in  the  case  of  brokers'  loans,  docs  not 
limit  its  activities  to  loans  but  these  brokers  also  execute 
orders  for  stocks  and  bonds  on  the  floor  of  the  Exchange. 
Inquiry  of  the  Stock  Exchange  as  to  the  number  of 
brokers  who  are  usually  concerned  in  tlic  fixing  of  the 
money  rate,  brought  the  reply  that  there  were,  as  a 
rule,  "4  to  8  or  more,"  the  Stock  Exchange  being  usually 
represented  by  either  the  President  or  "one  or  more"  of 
its  governors,  in  tlie  consultations  where  the  rate  is 
fixed. 

On  November  10,  a  year  ago,  tliis  brokers'  committee 
announced  that  the  renewal  rate  on  Call   Loans  would 


306  THE  STRANGLE  HOLD 

be  12%.  The  following  day,  November  11,  they  raised 
it  to  14%.  On  November  12  the  rate  was  raised  to  16% ; 
November  14  it  dropped  to  14% ;  on  November  21  it  was 
made  8%,  although  other  loans  were  made  as  low  as 
6%«  On  December  18  it  was  6%;  December  23  it 
was  raised  to  10%;  on  the  29tli  to  12%;  on  the 
SOth  to  15%  and  remained  at  that  rate  until  Janu- 
ary 5  when  it  was  lowered  to  10%.  On  January  31 
the  renewal  rate  was  12%,  the  next  day  February  1 
it  was  advanced  to  18%,  dropped  to  14%  on  February 
2;  advanced  to  17%  on  February  5  and  remained  at 
17%  until  February  9  when  it  was  reduced  to  14%.  On 
February  17  it  was  6%,  raised  again  on  February  26  to 
10%  and  continued  at  10%  until  INIarch  4  when  it  was 
reduced  to  9%.  On  April  16  the  renewal  rate  was 
again  10%.  In  May  the  highest  renewal  rate  was  9%. 
In  June  the  rate  was  9%  from  the  25th  to  the  30th. 
July  opened  with  a  10%  renewal  rate.  It  was  lowered 
during  the   month   but   returned   again   to   9%    on   the 

A  TOUCH    16th,  17th  and  27th.    It  is  gratifying  to  note  that  since 
OF  PUBLIC   the  publication  of  the  Comptroller's  statement  of  July 

coNTROii  22^  regarding  excessive  interest  rates,  the  'renewal"  rate 
does  not  appear  to  have  been  advancd  again  as  high  as 
10%. 

It  seems  clear  from  the  figures  submitted  that  the 
amount  of  demand  or  call  loans  in  the  National  and 
State  Banks  and  Trust  Companies  in  New  York  City, 
plus  the  loans  placed  by  them  for  their  correspondent 
banks,  which  are  effected  by  the  rate  fixed  by  this  Com- 
mittee of  the  Stock  Exchange,  probably  EXCEEDS  one 
thousand  million  dollars.    As  I  pointed  out  in  a  previ- 


APPENDIX  307 

ous  statement,  on  this  basis  an  advance  in  the  "Renewal" 

rate  from  6%  to  18%  for  one  day  would  add  $360,000 

to  the  net  profits  of  the  lending  banks  for  that  day.    In    "profit- 

the  first  part  of  January  of  this  year,  for  example,  the   Bering 

15%    "renewal"    rate    exacted    for    six    successive   days 

meant,  on  this  basis,  a  net  interest  profit  of  about  $3,000,- 

000  or  more  for  those  six  days. 

The  raising  or  lowering  of  the  "Renewal"  rate  on  the 
Exchange  is  frequently  accompanied  by  upward  or 
downward  movements  in  stocks  and  securities ;  and  those  a  crooked 
responsible  for  the  fixing  of  the  rate  therefore  have  the  game 
opportunity,  whether  exercised  or  not,  of  profiting  largely 
bj'  operations  on  the  stock  market,  which  is  so  often  and 
directly  effected  by  the  call  money  situation.  I  do  not, 
of  course,  undertake  to  say  that  this  informal  "money 
committee"  does  take  improper  advantage  of  their  fore- 
knowledge ;  but  there  are  critics  who  severely  censure  the 
existing  arrangements.  Certainly  all  prudent  and  tliink- 
ing  business  men  will  agree  that  there  is  danger  in  the 
concentration  of  such  opportunity  and  power  in  the 
hands  of  a  few  persons.  Temptations  to  use  this  power 
for  individual  profit  must  arise,  and  human  nature  is  not 
changed  by  high  position  in  tlic  financial  world. 

Mr.  Lincoln's  axiom  that  God  never  made  a  man  good  Lincoln 
enough  to  be  entrusted  with  unlimited  power  over  an-  said 
other  man  may  be  supplemented  witli  the  suggestion 
that  no  four,  or  six,  or  ciglit  men  are  strong  and  pure 
enough  to  be  entrusted  with  unlimited  power  over  the 
finances  of  a  great  country  without  direct  responsibility 
and  accounting  for  tluir  acts  to  the  jiublic  or  some 
other    potent    and    intelligent    authority.     Power    to    fix 


308 


THE  STRANGLE  HOLD 


AUTO- 
CRATIC 
POWER 


money  rates  for  all,  or  nearly  all,  of  the  banks  in  New 
York  City,  and  to  change  them  daily,  is  a  grip  on  the 
heart  of  our  commerce.  It  permits  such  interferences 
as  fallible  human  judgment,  whim  or  interest  may  direct 
with  the  natural  and  orderly  movements  of  money,  the 
life  blood  of  business.  Many  of  us  complain  bitterly 
when  we  fear  that  the  two  houses  of  Congress,  State 
Legislatures,  or  State  or  Federal  administrators,  acting 
in  the  open,  and  after  debate  and  public  hearings,  have 
interfered  with  natural  laws  of  trade.  We  condemn 
RADICALISM  radical  writers  and  speakers  who  advocate  such  inter- 
ferences and  regard  them  as  public  enemies.  Yet  the 
matter  of  arbitrarily  fixing  money  rates  at  the  money 
center,  possibly  reversing  the  natural  and  healthy  flow 
and  effecting,  directly  or  indirectly,  billions  of  dollars 
of  security  values  and  other  property,  is  left  to  a  small 
and  varying  number  of  private  citizens  without  official 
responsibility,  deciding  in  a  moment  and  in  secret. 
DANGEROUS  The  evils  and  dangers  of  such  methods  could  be  re- 
AND  cited  indefinitely.  They  reach  to  the  remotest  corners  of 
HARMFUL  j.]^g  Union  and  its  possessions,  and  touch  harmfully  every 
PRACT  c  (.jjjgg  of  people.  The  direct  tendency  is  to  reverse  one  of 
the  fundamental  purposes  of  the  Federal  Reserve  Act, 
which  is  to  promote  orderly  distributjion  of  money 
through  the  country  to  meet  the  needs  of  commerce  and 
agriculture. 

Excessive  interest  rates  offered  in  New  York  arti- 
ficially draw  money  away  from  outside  communities 
and  often  leave  legitimate  enterprises  starved  or  pinched, 
while  feeding  speculative  movements  which  may  be  add- 
insT  nothing  to  real  industrial  or  commercial  wealth. 


APPENDIX  309 

I  reiterate  the  statement  previously  made  that  the  ex- 
cessive rates  on  call  money,  arbitrarily  fixed  and  toler- 
ated in  New  York,  in  my  opinion,  have  been  a  potent  in- 
fluence in  depressing  seriously  the  prices  of  all  invest- 
ment bonds  and  standard  shares,  the  shrinkage  in  which  niLi.ioNS 
in  the  past  twelve  months  has  amounted,  including  the  lost 
depreciation  in  Liberty  Bonds  to  several  billion  dollars. 

It  is  no  part  of  the  function  of  a  Government  official 
to  moralize  on  speculative  operations.  My  attention  is 
demanded  when  such  operations  produce  conditions  re- 
tarding the  development  of  the  country  and  endangering 
the  stability  of  its  business.  Corporations,  individuals 
and  investors  generally  are  drawn  away  from  legitimate 
investments  in  new  enterprises  and  in  the  shares  and 
bonds  of  existing  enterprises  by  the  prospect  of  10% 
to  20%  interest. 

The  effect  of  these  rates   is  seen  when  the  general    everybody 
managers  or  executives  of  railroads  or  other  large  cor-    ^^'^"^ 
porations  visit  New  York  to  raise  money  necessary  for 
the   redemption   of   retiring  loans   or   for   the   extension 
and  promotion  of  new  business.    The  bankers  and  bond 
brokers  solemnly  point  to  the  high  rates  paid  for  "call 
money"  and  corporations  whose  credit  abundantly  jus- 
tified a  5%  or  6%  interest  basis,  have  been  forced  to 
pay  7%  or  8%  or  10%  on  loans  for  one  year,  three 
years  or  five  to  ten  years;  and  are  sometimes  persuaded    the 
by   the   bankers   through   whom   they   obtain   tlie    funds   ^-^""OTE 
that  they  are  doing  well  to  get  money   even  on   such 
terms,  because  money  on  call  has  been  advanced  often 
artificially  to  12%  or  15%  or  20%,  for  ;i  few  days  at 
a  time. 


SIO  THE  STRANGLE  HOLD 

The  sophistical  argument  that  a  high  rate  for  call 
loans  is  a  justification  for  a  long  time  loan  at  8%,  10% 
or  12%  by  a  strong  and  solvent  corporation  is  trans- 
parent, but  many  excellent  corporations  have,  during  the 
past  12  months,  been  forced  to  accept  loans  at  exorbitant 
rates  of  interest  for  term  of  years  which  will  inevitably, 
in  some  cases,  prove  a  serious  embarrassment  and  handi- 
cap in  their  future  operations. 
ALL  ARE  The  same  cause  that  cripples  and  hampers  a  great 
VICTIMS  railroad  system  or  a  municipal  government  also  de- 
prives and  injures  or  ruins  a  country  storekeeper,  a  small 
farmer  or  the  owner  of  a  large  or  little  manufacturing 
enterprise. 

The  argument  that  these  high  money  rates  prevent 
panics  by  enticing  call  money  from  banks  and  others  in 
the  interior  to  New  York  will  not  bear  analysis.  The 
facts  are  that  much  of  the  money  drawn  from  the  in- 
terior and  loaned  on  call  in  New  York  at  fancy  rates 
would,  but  for  the  temptation  of  the  high  rates  and  the 
fear  which  they  instill  as  to  the  future  of  the  security 
market,  be  used  by  investors  and  banks  and  corporations 
who  have  those  idle  funds  in  the  purchase  of  standard 
railroad  and  other  bonds;  which  would  thus  furnish 
funds  to  the  New  York  market  normally  and  naturally. 

The  high  rates  for  call  money  in  New  York  have  thus 
shut  off  a  large  part  of  the  investment  demand  for  secur- 
ities, which,  during  the  past  12  months,  largely  because 
of  those  disturbing  conditions,  have  been  forced  down  to 
the  lowest  prices  reached  in  40  years. 

It  is  my  belief  that  if  the  call  money  rates  in  New 
York  had  been  maintained  at  6%,  or  at  the  maximum 


APPENDIX  311 

rates  which  are  charged  in  other  money  centers,  as  I 
believe  could  have  been  done  with  a  reasonable  degree 
of  co-operation  upon  the  part  of  the  New  York  banks, 
the  unprecedented  shrinkage  in  security  prices  in  the 
past  12  months  would  not  have  taken  place  and  the  ap- 
parent loss  of  billions  of  dollars  in  values  would  have 
been  avoided. 

My  hope  for  the  present  is  that,  with  the  public  in   need  of 
possession  of  the  facts,  sentiment  will  be  strong  enough    Reform 
to    bring   about   reforms.     Money    rates    should    not    be 
raised  or  lowered  or  manipulated  arbitrarily  or  in  secret. 
New  York  bankers  and  financiers  have  tremendous  re- 
sponsibilities to  the  general  public,  and  all  can  be  in- 
duced to  realize  and  respect  them,  as  some  honestly  and 
conscientiously  do  now.    Bankers  throughout  the  country 
should  have  impressed  upon  them  th.it  they  owe  direct 
and  distinct  duties  to  their  customers  and  communities, 
in  preference  to  earning  excessive  and  questionable  prof- 
its for  stockliolders  and  themselves,  by  pouring  money 
into  New  York  for  interest  exactions  which  inevitably 
most  injure  or  destroy  somebody.     The  best  banking  is 
the   broadest   and   most   foreseeing — that   b.ised   on   the 
conviction  that  the  real,  permanent,  stable  profit  in  busi- 
ness is  in  building  up,  encouraging  and  developing  i;> 
their  prosjiective  spheres,  not  in  starving  the  productive    object   op 
elements  of  communities  in  the  hope  of  grabbing  large   reform 
profits   from   the   speculative. 

Reports  showing  the  extent  to  which,  as  referred  to  in 
my  statement  of  July  31st,  banks  in  Now  York  City  and 
elsewhere  have,  during  the  past  year,  been  obtaining 
funds  from  the  Federal  Reserve  Banks  at  rates  varying 


312  THE  STRANGLE  HOLD 

from  four  and  one-half  to  six  per  cent  and  have  loaned 
these  funds  in  New  York  at  the  excessive  rates  referred 
to,  running,  in  some  instances,  as  high  as  20%,  25% 
and  30%,  are  now  being  compiled.  A  statement  con- 
cerning these  transactions  will  be  made  later, 

October  22,  1920. 

Comptroller  of  the  Currency  said  today: 

MILLION    DOLLARS    OF    N-    Y.  LOANS    CON- 
STANTLY AFFECTED  BY  RATES  ARTI- 
FICIALLY FIXED 


Additional  Examples  of  Loans  on  Which  20%  and  25% 
Are  Charged.  Interest  and  Discount  Collected  by 
N.  Y.  National  Banks,  6  Months  Ending  June  30, 
1920,  Was  About  $100,000,000  Which,  as  Compared 
with  Same  Period  in  1917  Is  an  Increase  of  about 
$50,000,000  in  Interest  Collected. 


SPEAK    UP 


LET  THE  Criticisms  on  the  statement  given  out  by  this  office 
BANKERS  £qj.  ^|jg  newspapers  of  Monday  last  seem  to  me  to  be 
rather  vague  and  feeble  as  well  as  anonymous.  I  hoped 
they  would  be  strong,  illuminating  and  constructive.  I 
am  constrained  to  believe  that  they  do  not  express  the 
thought  of  the  bankers  of  the  country  or  of  New  York, 
who  certainly  are  men  of  ability,  with  intelligence  and 
courage  to  speak  clearly  and  frankly  when  they  wish  to 
speak. 

One  of  the  functions  of  this  office  is  to  do  all  pos- 
sible to  maintain  and  increase  the   goodwill  and  confi- 


APPENDIX  313 

dence  of  the  public  in  the  banks  of  the  country.     To 

PUBLIC 

that  end  continual  labor,  frequently  troublesome  to  all  ^q^^^. 
concerned,  has  been  applied  to  make  sure  that  the  man-  denck 
agement  and  conduct  of  all  banks  should  be  such  as  to  needed 
deserve  goodwill  and  confidence.  Following  along  that 
same  line,  I  think  it  riglit  to  reiterate  some  expressions 
included  in  the  statement  referred  to,  but  unfortunately 
omitted  by  many  newspapers  which  published  portions 
of  it.  These  are,  that  there  is  no  purpose  in  tliis  office 
to  stir  or  cater  to  any  prejudice  against  that  great  and 
useful  part  of  our  financial  system  popularly  kno^vn  as 
"Wall  Street";  that  there  was  and  is  no  purpose  to  hold 
up  the  New  York  City  bankers  or  any  other  bankers  for 
special  condemnation.  It  is  my  duty  to  discover  and 
oppose  what  I  believe  to  be  evils  and  dangers  threaten- 
ing or  impeding  the  business  of  the  country.  There 
has  been  no  attack  on  individuals  or  individual  interests. 
The  criticism  from  this  office  has  been  against  a  system 
and  method.  The  first  step  toward  correction  of  any 
wrong  must  be  discovery  and  exposure. 

Statements   of   the   existence   of   extortionate   interest   criticism 
rates  in  New  York,  affecting  the  operations  of  the  whole    J^'stifikd 

11  1  1.  u  BUT   NOT 

country,  made  by  me  some  weeks  ago,  were  met  by  sneer- 
ing denials  through  newsjiapcrs.  Thereupon  it  became 
necessary  to  present  confirmatory  specifications  and  evi- 
dence. This  has  been  done.  Anonymous  and  indefinite 
denials  are  not  contradictions.  Statements  of  facts  and 
figures,  sworn  to  by  the  banks  themselves,  cannot  be 
met  by  excited  rhetoric  or  general  denunciation,  or  un- 
sustained  accusation  of  improper  motive. 

In  my   previous  statement  I   showed  that  tlic   nc^grc- 


APPRE- 


314  THE  STRANGLE  HOLD 

gate  of  these  Demand  or  Call  loans  secured  by  bonds 
and  stocks  handled  by  the  New  York  banking  institu- 
tions for  their  own  account  and  for  account  of  their 
correspondents^  ujDon  which  interest  rates  varying  from 
7%  to  30%  have  been  charged^  has  probably  averaged 
throughout  the  past  year  more  than  ONE  BILLION 
DOLLARS. 
OFFICIAL  The  assertion  by  anonymous  critics  that  the  exorbi- 
REPORTS  tant  interest  rates  were  rare  and  applied  to  insignificant 
sums  will  not  weigh  against  official  reports  made  to  this 
office  under  oath.  We  find,  for  example,  one  National 
bank  declaring  that  loans  made  by  it  in  the  period  cov- 
ered by  my  statement  at  rates  in  excess  of  10%  per 
annum,  aggregated  $448,000,000,  including  $186,000,000 
(1426  loans)  at  rates  of  15%  and  over.  On  a  certain 
day  within  this  period  another  bank  reported  that,  on 
loans  for  itself  and  correspondents,  it  was  charging 
15%  on  $55,895,000,  and  18%,  19%  and  20%  on 
$3,600,000  additional.  The  same  bank  admitted  ex- 
ROBBERY  acting  on  another  day  18%  on  $57,183,000,  20%  on 
$1,400,000  and  25%  on  $14,055,000.  On  three  days 
early  in  January  the  amount  on  which  this  bank  was 
charging  18%,  exceeded  $63,500,000. 

Another  New  York  national  bank  reported  that  it 
was  charging  on  a  certain  day  on  loans  made  for  its 
account,  16%  on  $23,500,000  while  two  days  previously 
it  was  loaning  at  14%,  $27,100,000  and  at  16%  and 
18%  $315,000  more;  another  day  this  bank  reported 
that  loans  at  17%  to  20%  exceeded  $17,000,000.  On 
December  31  last  the  same  bank  made  11  new  loans 
for  over  $2,000,000  at  25%,  and  on  January  2  it  made 


APPENDIX  315 

53  new  loans  aggregating  $10,000,000  at  15%  in  addi- 
tion to  some  millions  already  out  at  15%. 

Still  another  bank  reports  that,  on  a  particular  date   insiders 
during  the  past  year,  it  was  charging  on  loans   for  its   and 
own   account,  25%   on  $2,150,000,   13%   on  $300,000,   outsiders 
15%  on  $10,900,000.     On  another  date  the  same  bank 
was  charging  22%  on  $2,000,000  and  11%  to  167o  on 
$8,200,000  additional,  with  other  loans  at  the  same  time 
bearing  7%,  8%,  9%  and  10%.     This  particular  bank 
has    through   this    period   been    lending,    as    have   other 
banks,  many  millions  more  at  exorbitant  rates  for  corre- 
spendent  banks.     The  foregoing  figures  relate  to  only 
four   of   the   thirty-four    national    banks    in    New    York 
City  and  they  are  matters  of  record. 

It  is  of  interest  to  the  public  that  most  of  those  New 
York  banks,  a  few  of  whose  loans  are  given  above,  while 
lending  at  these  very  indefensible  rates,  sometimes  25%  some 
and  30%,  were  being  accommodated  at  tlie  same  time  at  PROf'T 
4l/^7o  to  6%  by  the  Federal  Reserve  Bank  of  New 
York  with  sums  as  great  or  greater  than  their  loans 
recited  above.  They  were,  therefore,  occasionally  charg- 
ing borrowers  20%  to  25%  more  interest  than  the  rates 
they  paid  the  Reserve  Bank. 

The  amount  actually  collected  for  interest  and  dis- 
count by  the  thirty-four  national  banks  in  New  York 
City  for  the  six  months  ending  June  30,  1920,  exceeded 
all  previous  records,  and  amounted  to  ajjjiroximately 
One  Hundred  Million  Dollars  ($100,000,000),  which 
was  nearly  Fifty  Million  Dollars  ($50,000,000),  or  the 
nearly  100%  in  excess  of  similar  receipts  for  the  cor-  "swag 
responding  period  in  1917. 


S16 


THE  STRANGLE  HOLD 


In  February  last,  the  "Renewal"  rate  in  New  York 
City  for  the  whole  month  averaged  above  10%.  This 
was  more  than  double  the  normal  average  for  call  money. 

While  nearly  every  national  bank  in  New  York  City 
has  admitted  that  its  rates  on  the  so-called  "street"  or 
"brokers"  loans  are  marked  up  or  down  automatically 
from  day  to  day  according  to  the  fluctuations  of  the  call 
money  rate,  yet  reports  from  some  banks  show  a  marked 
discrimination,  and  that  they  exact  on  some  of  the  well 
secured  loans  rates  considerably  in  excess  of  the  so- 
called  daily  "Renewal"  rate,  while  other  banks  adhere 
quite  closely  to  that  rate. 

As  to  the  large  amount  of  call  loans  held  by  national 
banks  for  account  of  correspondents  (over  $500,000,000) 
it  may  be  of  interest  to  state  that  the  New  York  banks, 
DIVISION  for  their  services  in  handling  these  loans,  make  varying 
OF  LOOT  charges — sometimes  a  fractional  commission  is  charged; 
sometimes,  in  view  of  the  deposit  balances  carried,  no 
charge  is  made;  while  at  other  times,  the  New  York 
bank  and  its  outside  correspondents  divide  evenly  the 
interest  collected  in  excess  of  six  per  cent  per  annum. 

New  York,  as  I  have  stated  before,  is  the  only  city 
of  any  importance  in  the  world  where  such  interest  rates 
as  these  exist  or  are  tolerated.  They  have,  in  my  opin- 
ion, been  most  costly  to  the  entire  country  and  can  not 
be  justified  on  any  basis  of  economics  or  ethics. 

The  plainly,  indisputably  proper  course  is  change  of 
policy  and  reformation  of  abuses  which  have  come  al- 
most imperceptibly,  not  loose  and  wholesale  criticism 
of  the  man  trying  to  heave  the  lead  line  and  give  warn- 
ing of  shoals. 


REAL 

PATRIOTISM 


APPENDIX  317 

The  point  is  not  the  qualities  or  intentions  of  the 
oflScial,  but  whether  the  shoals  are  there.  My  work  is 
to  report  them  and  prove  where  they  are.  My  strong 
faith  is  that  the  bankers  of  tlie  country  will  find  and 
apply  cure  for  the  evil  that  has  been  shown.  They  have 
on  them  now  some  of  the  heaviest  and  most  difficult 
responsibilities  which  ever  rested  on  a  financial  body. 
The  welfare  not  only  of  their  own  country,  but  of  the  for  hu- 
world,  depends  in  a  great  measure  on  their  wisdom  and  ^ianitys 
character.  I  believe  they  will  meet  the  test.  The  most 
important  part  of  the  Comptroller's  work  is  to  help  them, 
as  he  may.  There  is  no  better  way  to  help  than  to 
detect  and  point  out  obstacles  and  perils  in  their  path 
toward  performance  of  the  tremendous  work  they  have 
to  do. 


»  ti 


NOTE 

The  foregoing  statement  of  the  Comptroller  is  worthy 
of  careful  consideration.  It  impresses  the  unbiased  mind 
as  a  fair  statement  of  fact  and  a  dignified  apjieal  for 
justice.  Reading  between  the  lines  we  find  complete 
confirmation  of  all  that  has  been  said  regarding  the 
autocracy  of  our  financial  system. 

The  last  paragraph  is  an  appeal  to  our  financial  auto- 
crats for  justice  and  clemency.  Such  petitions  were 
addressed,  in  times  passed,  to  political  rulers.  Is  it  ill 
keeping  with  American  princijiles  or  ideals  that  we 
should  ask  the  bankers  to  reform  a  practice  from  which 


318  THE  STRANGLE  HOLD 

we  all  suffer  or  is  it  the  place  of  a  free  people  to  reform 
the  laws  so  that  such  abuses  cannot  exist  ? 

It  is  not  the  bankers'  duty  but  the  citizen's  duty  to 
correct  these  abuses  and  the  banker  must  not  be  blamed 
so  long  as  he  is  permitted  to  take  advantage  of  our 
neglect. 

A  great  burden  of  responsibility  rests  on  every  citizen 
until  our  system  of  finance  is  reformed  so  that  such 
abuses  are  made  impossible.  It  is  a  duty  which  we  owe 
to  ourselves,  to  our  country  and  to  all  humanity. 


INDEX 


Pase 
ACCEPTANCES,  how   used....   124 

ABUSES    OF   SYSTEM 

157,   166,   167,   171.  226 

"ALL    THE    TRAFFIC    WILL 

Bear"    36 

See   usury 

AMERICA,   stands    for 150,  295 

AMERICANIZE   AMERICA.150,  158 
i^MERICAN  BANKERS  ASSO- 
CIATION 
Protest   comptroller's   state- 
ment        165 

AMERICAN  PRINCIPLES 295 

Violated     1 4S,  226.  228 

APPEAL 

Given    taxpayer 110,  140 

Jury    on     141 

APPENDIX    296-317 

APPRAISER.    People    are..  104,  113 

APPRAISEMENT 104,  109,  112 

Land,    etc 107,  123.   IbO 

Laws   Required    140 

Perfected     113,   139,  143 

Personal  property.  105,  112.  160 
ARBITRATION  of  assessment.  141 
ASSESSMENT 

Appeal     from Ill,  140 

Arbitrary     107 

Arbitrated    111,141 

Certificate    of     143 

For  taxes   106.  141 

Guess    work    107 

Used    as    appraisement 

100,   139,   143 

ASSESSOR    106,  139 

Appeal    from    140 

Arbitrary   power    109,   111 

Certilicate    143 

AUTOCRATIC    POWER 

.34,  35.  115.  157.  172.  230.  308 

Abuses    of    166,  173 

AUTOMOBILE 

As    security     124 

Declared   a   luxury 157 

SellinK   plan    6,  124 

Reverse  Rear  illustration. 60,  78 
AUTOMOBILE  DEALERS 

Excluded    from    bank 5 

Injustice  done    167 

Pr.pcr  could   be   used 124 

SeilinK    plan 6,124 

Wrongs  done  by  system 7 

BANK 

Capital  private  property...   119 


Pa^e 
BANK— Continued 

ClearinK    26 

Deposits  created  by  loan. . . 

24.  34.   117 

Laws   to   govern 

135,   136.  138.  144 

Lends  credit,   not   money. 26,   34 
Loans 

General    interest. .  .3,  117,  148 

How   made    23,  67,  160 

Refused    120,   124.   Ur 

Renewed    131 

On    land    160 

Personal     property.  ..  159.   160 
Risht,    not    privilege.  121.    160 

Mints   our    money 226.  229 

Not   to   be   changed 118 

Operation  of    22 

Origin    of    20 

Public     utility 

35,  39,  117,  121.  123,  147 

Reform 

Object    of 

48.  117,  118,  136.  217 

Of    national    114 

Of   state    136 

Reserves    (see    Reserve)....     27 
Rules  for  government  of... 
185,  136,  138,  160 

BANK  CREDIT 

Created,  how 22.  24,  34,  67 

Crystallized  into  currency.  .  226 

Federal  Reserve  notes  are.  .  222 

Limit 27,   73,  98 

Percentage  of    21 

Safety     101 

Use  of  a  ri^ht 117,  273 

BANK  DEPOSITS 67 

BANK  NOTES 

Origin     66 

Change  suggested  by  Shaw.  186 

BANK  OF  ENGLAND 263 

BANK    OF   FRANCE 269 

BANK    OF   GERMANY 270 

BANKER 

Alv/ays  conservative 232 

Appraiser  security    107 

Autocrat    157,  230,  306 

Broke  law    80 

Caused  panics    66 

Duly   to   llnanrc  farmer....  20« 
Enicioncy    compared    to 

farmer   201 

Encoiirngcn   gnmblins    195 

"l-Uhical"  methods    171 

loudal    lord    152 


INDEX— Continued 


Page 
BANKER— Continued 

Follows  Goldsmith's  practice 

21.  24,  67 

Good    faith    tested 281 

Guilty  of  usury 166,   315 

In  the  stock  market 192 

May    refuse    loan..  120,  124,   136 
No  desire  to  injure 

118,  282,   317 

Not  blamed 147,  156,  280 

Our   guardian    154 

Opposed    Federal    Reserve.  .   232 

Power  of 34,  35,   152,  224 

Protection    for    2855 

Responsible  for  stock  prices  105 

Rules   country    58,    80 

Trespasser     162 

Use  greenbacks 237 

Uses    nation's   credit 222 

Wallingford    243 

BANICERS'  STRIKE    44 

BANKING,  "ethical"    170 

BANKING   SYSTEM,   based   on 

deception    66 

BANKS  DO  NOT  COMPETE..   117 

BAR  TO  PROSPERITY 1.  15.  98 

BILLS   OF   CREDIT,   state   not 

to  issue   131 

BOARD    OF  EQUALIZATION.   109 

Appeal  from   110,  140 

Law  to  govern  appeal 140 

BROKERS     fix     rate     on     rail 

money    194,  302 

BUSINESS 

Check  on 79,  128,  220.  257 

Certainty   secured    160 

Improved    100,  286 

No  upset  to    145 

Slump     16 

Worries  gone   161,  28'> 

"BUYERS'  STRIKE" 

7.  43,  57,  100,  219 

Would    be    none 285 

Wrong  term 44 

CALL  MONEY 

Governs    foreign   exchange.  261 
Makes   stocks   fluctuate.  194,   307 

Rate  on 164.  194,  801,  306 

CAPITAL    OF    BANK,    private 

property    119 

CAUSE  OF  TROUBLE,  fluctua- 
tion of  dollar 12,  87.  257 

CERTIFICATE     OF     ASSESS- 
MENT      14S 

CHAINS,  invisible  now 158 


Page 
CHINA,  condition  explained...  271 
CIVILIZATION 

Object   of    156 

Result  of   266,  273 

CLEARING,  accomplished,  how     25 
CLEARING   HOUSE   CERTIFI- 
CATES    69,  71 

Comedy   of    71 

Not  authorized    185 

CLEVELAND,  administration  of       9 

"CLOSED  SHOP" 148 

COINAGE 

Government  right... 80,  131,  134 
In  private  hands.. 128,   130,  226 
COMPETITION  between   banks     40 
COMPTROLLER   OF   THE 
CURRENCY 

Appendix     297 

Approves  of,  Fed.   Res 215 

On    interest    163 

Quoted     166,  297 

Report 70,   166,  216 

Stopped    direct   usury 173 

Table    showing    percentages 

of  medium    21 

CONCLUSION    275-295 

CONFIDENCE 

First     requisite 

86,  103,  242,  257.  282.  313 

Goldsmith   retained,   how. . .     66 

100%     99 

Maximum 101,  113,  122 

CONSTITUTIONAL       PROVI- 
SIONS  80.    131,   144,  228 

Officials    should    uphold....   134 

CONTRACTION 41,  43,  49,  113 

Explained     46,  91 

Reasons  for 50,  54,  53,  258 

COST  OF  LIVING 8,  9,  10 

Not  cause  of  turmoil    ...11,  286 

Affected,   how    12 

CREDIT 

Amount  of    245 

Denial  to  automobile  dealer  157 

For  Farmer 212 

Nation's,   loaned  to  bankers  222 

Reason  for  use 64 

Reform    needed 

65.  79,  101.  128.  159,  219 

Safety    secured    101 

"CREDIT    STRUCTURE." 

dangerous    165 

CURRENCY,  elasticity   sought. 

217.  225 

Fed.   Res.    Notes   not 226 


INDEX— Continiud 


Pape 
DANGEROUS   PRACTICES....   308 
DECEPTION  in  bankinK..66,  71,  76 
Proposed     by     Secretary     of 

Treasury    185 

DECLARATION       OF      INDE- 
PENDENCE  146.  29B 

DEPOSITOR,     bank     does     not 

lend  money  26 

DEPOSITS 

Created  by  loan 24 

Remain  deposits    25 

DISHONESTY  overcome 125 

DOLLAR 

Cause  of   H.   C.   L M.  286 

Compared  to  foot 14,  87 

Fluctuation   of  value 14,   46 

Stabilized 46,  87,   113 

EDGE    ACT    5.  156 

Object   256,  265 

ELASTICITY 92,   217,   225 

EMERGENCY  CURRENCY 

ACT 72,   185,   186 

ENGLISH  EXCHANGE.... 248,  254 

TBank   system    268 

Used  tricks  to  escape  gold. .     75 

EPITKET3  not  justified 146 

"ETHICAL"  BANKING....  170,  171 
EVOLUTION  OF  MEDIUM  OF 

EXCHANGE 18,  31 

EXCHANGE,    see    Foreign    Ex- 
change 

Primitive     18 

EXCHANGE  SYSTEM 

Cause   of    trouble 16 

Evolution   of    18 

Outtrrown    32,   128,280 

Perfected    84,  144 

EXPANSION,  see  Inflation 
EXPORTER  like  farmer. .  .256.  285 

FARM    LOAN    ACT 

4.  200.  202.  205.  210 

Effect  of    205 

Implication    of     200 

Not  a  success    204 

FARMER 

Ability   justifies    credit 209 

Compared  to  Banker 201 

Indian    20(1 

Manufacturer     207 

Shipper      4  4 

Favors    reform    19S 

EtTicioncy    of     201 

Illuatration    41,  49 


PaK«- 

FARMER— Continued 

Outlawed   by   system 

200.  210.   285 

Secures   loan   then 123 

Shipper    44 

Now    203 

Securities  should   be  liquid.   210 

Time  lock  on  bank 209,  211 

Robbed    by    banking   system  287 
Ward   of   government 200 

FARM    LOAN   ASSOCIATION.   203 

FARMING    compared    to    manu- 
facturing        208 

FAVORITISM     303.  305 

Overcome 116,    118.   124 

FEAR,  banker's,   rules  country.     67 

FEDERAL  RESERVE  ACT....  214 

Approved     214 

Chanjres  8UKeKsted.l35,   144,   231 
Incicases    banker's   power.  .   224 

Object  of 46,  67,  72,  217,  225 

Opposed   by   bankers 232 

Prejudices    overcome 221 

Proves  coin   motto 216 

Section    11-C    217 

Shows  folly  of  gold  standard    76 

Use  of  jcreenbaoks 236 

Unlimited    paper    currency.   221 
Violates       American      prin- 
ciples      221.  226 

Violates    conjlitution.  .  .133.  228 

FEDERAL  RESERVE  BANK 

NOTES  215 

FEDERAL  RESERVE  BOARD 

Effect    of    rules 160 

Given   control    by 1-14 

Rules  to  make   144 

Should   control   banks 136 

Suspend      reserve      require- 
menta     217 

FEDERAL  RESERVE  NOTES.   215 

Bank   credit    2;i5 

How    issued     226 

Reserve   airaiiist    217 

FEDERAL  RESERVE  SYSTEM 

211-231 

AKgravntes   defect    2S0 

Bankers'  banks    228 

Not  a  cure 230 

Objfct   of    217 

R..Hi.Tve  h.-M 74.  217.  211 

FEUDAL  SYSTEM   131 

FEUDALISM    financial 152 

FICTION 

Loan   in  a  deposit 24,  26 

Of  guld  bl4iadara Gti.  76,  245 


I ND  EX— Continued 


Papre 
FINANCE  COMMITTE   23 

"Money   trust"    35 

FINANCIAL  MASTERS   152 

FLAWS   IN    SYSTEM 

...4,  81,  95,  S8,  148,  166,  173 

Basic    79,  257 

Stated    81.  148 

Shown  by  world  conditions     16 

FLUCTUATION  OF  DOLLAR. 

12,  14,  87,  236 

Explained    88 

Stopped 47,  84,   113 

FOREIGN  EXCHANGE 247-265 

Explained    255 

Gold  reserve  in 247 

Price   hurts   us 263 

Value  of    248 

FOREIGN     TRADE     FINANC- 
ING CORPORATION.. 5,  256 

FREE  COINAGE 

Of    gold    228,  229 

Of  credit    223,  230 

FREE?;iNG  POINT  OF 

CREDIT 77,   94,   189 

FRENCH    EXCHANGE 253 

Banking   System   269 

"FROZEN  CREDIT" 7,  63 

Cause 77.  94,  99,  189,  219 

GARROTE   309 

GERMAN    EXCHANGE.... 253,  264 
Banking  system   270 

"GLARING  DEFECT" 186 

GOLD,  a  commodity 176 

A   standard   of    value 177 

Amount    in    dollar 58 

Fallacy  of   178 

First  used  as  money 19 

Foreign  exchange 247,  258 

Free   coinage    228 

Reasons   for   use 63 

Stopped  silver  talk 89 

Value  of    58 

Worship    of 68,   175 

GOLD  REDEMPTION 

A  joke 68,  75.  245,  2.^9 

Deception    practiced    20 

Juggled 71,   76,  217 

Trouble   maker 180,   246,   257 

GOLD  STANDARD 175 

Explained    176 

Origin    of    20 

Causes  contraction 

54,  68,  63 

Effect  of 60.  63,  258 


Page 
GOLD  STANDARD— Continued 

Shown  to  be  fiction 

75,   176,   181,  219,  245 

Secretary  Shaw  on...  181,  183,  184 

GOLDSMITHS 

Became    bankers,    how 66 

First  bankers'    19 

GOVERNMENT 

Controlled  by  bankers. ..  .66,  58 
Should   coin   money 133 

GRAFT,  none  possible 116 

GREENBACKS   236 

Held  as  reserve 74,  241 

Used  by  banker 237 

GUARDIAN 

Banker  is    154 

No  longer  necessary 161 

"H.  C.  L." 8,  123,  219,  288 

Caused    by     12 

Defined     9 

Not  cause  of  turmoil. . .  .11,  286 

HISTORY 

Of    finance    180 

Should   show    273 

Taught   131 

IDEAL 

Modium  of  exchange 86,  £5 

Transportation   medium. ...     85 

ILLUSTRATIONS    277,  278 

IMPROVED  BUSINESS 

METHODS     159,  287 

INDUSTRIAL   STRAIT- 

JACKET    46 

INDUSTRIAL  TURMOIL. .  .87,  143 

INFLATION 

Caused  by   war 13 

Effect  of.  14,  46,  51,  92,  113,  25:; 

ExpL-iined    46,   87,  91 

Foreign    exchange    253 

INHERENT  RIGHTS   148 

INTEREST 163 

Call  money... 164,   194,  301,  306 

"Ethical"    extortion     170 

Usury 168,  170.  314 

INTRINSIC   VALUE    190 

I.  O.  U.  illustration 95,  97 

JUROR,  qualifications    142 

JURY   OF    ARBITRATION 

Ill,   140,   141 

KIND  OF  MONEY  not  changed  159 

"LACK    OF    DEMAND" 44 


IV 


INDEX— Continued 


LAND 

Appraisement  of. .  .106,  107,  160 
Loan  on,  how  secured. .  123,  160 
National  banks  should  make 

loan     135 

"LAWFUL  MONEY"... 74,  241.  273 
LAW3  BROKEN  by  banker. 80.  132 

LAWS  REQUIRED 

110,  136,  140.  141.  144 

LIBERTY  AND  EQUALITY...    148 

Cannot  exist    157 

LINCOLN   quoted    307 

"LIQUIDATION"    7 

UQUID    SECURITY    210 

LIVING  COST 

Kiph  8 

Low    9 

LOAN 

A   privilege    277 

Banker  may  refuse  to  make 

120,  124,  136 

Confidence   in    112 

Is    a    deposit 24 

Made   now    23 

Made  then    123,  160 

Must  be  secured 119 

On    land    159 

On  manufactured  articles..    112 

On  personal  property 

104.    105,    112,   159 

Percentage  of    115 

Question   asked    154 

Refused    to   farmer 42 

Renewal    of    Itl 

Right   to    117,   121,   278 

Time   limit  on 210,  256 

LOAN  COMMITTEE  23.  116 

LOCKE,    philosopher    93 

LORDS,   financial 152,  154 

MARGIN,    stock   bouRht   on 191 

Loans  made  on 161 

MARKET  VALUE    190 

MEDIUM  OF  EXCHANGE 

Bank   credit    22 

Define'!     84 

Evolution  of 18,   31 

Metal     9fi,  272 

Object     of 87,  95 

Perfection  of   95 

Public    utility 35.   12S 

Table   Showing   percentases     21 

Three  flaws   in    81 

MERCANTILE   AGENCIES...   125 
METALLIC   SYSTEM    9ft 


Page 
MEXICO 

SufTers  from  railroad  break 

down     41 

Mint  in  private  handa 129 

MINT 

In   private   hands.  .129,  226,  229 

MONEY 

Amount  needed   98 

Bank  does  not  lend 26 

Basic    flaw    in 267 

Coinage  of 80,    131.    133,  226 

Defined     84 

Fluctuation    of    volume.... 

14,   47,   88.   94.    113,   130 

I.    O.    U.    system 95,97 

Like  transportation   8£ 

No  change  in  suggested...   169 

Not  used   2ft 

Not   value 

Object   of    use 87 

Paper    unlimited     221 

Percentages   of    21 

Public    utility.  ..31,    36,    85,  128 

Safety   secured    101 

System    of    bookkeeping....     95 
Who  issues  226 

MONEY  POWER  destroyed 291 

Fed.    Res.    increases 224,226 

"MONEY   TRUST"    149.  168 

Located     35,  154.  226 

Killed     289 

"MORAL  HAZARD".. 118,   126.  189 
Not  allowed    119 

MOTTO   ON   COIN 214 

NATIONAL  BANKS 

Lend    on    land 135.160 

Loans  on  personal  proptrfy   159 
Rules    governing    135,  144 

NATIONAL    CURRENCY    AS- 
SOCIATION       69 

NATIONAL    EFF1CII:NCY  .266-274 

Case    of   England 263 

China     271 

Due  to  hank  system 267 

France   269 

Germany    270 

Our  own    

NATIONAL  FARM  LOAN  A8- 

SOCI.\TION  202 

NEW  KIND 

Of  money  not  necessary...   189 

NEW   YORK    166 

Should    bo   world's   cIrarinK 

houue    185 

Stock  exchange   188 

NOTHING  NEW   169 


INDEX — Continued 


Page 

NORMAL    CONDITION    220 

How  betttred  94 

"NORMALCY"   7,  93.  94.  220 

OBJECT  OF  MONETARY  RE- 
FORM    48,  217,  220 

OHIO     B  4  NKEKS     ASSOCIA- 
TION      181 

100%   CONFIDENCE... 99.  103,  242 

"OPEN  SHOP"    149 

"OVER    PRODUCTION"    44 

Blamed    for    slump 43,  287 

PACKERS 8 

PANICS     69,  200 

Cause     55,  71 

Occurred     54,200 

PAPER   MONEY  unlimited 221 

Issued    227 

PEOPLE    appraise   property. . .   105 

Deceived    63 

Do  not  rule 56 

Forced    to    .^ccept    clearing 

house  certificates    71 

PERCENTAGE    OF   LOAN   TO 

VALUE 104,    115,    160 

PERFECTION  OF  EXCHANGE 

SYSTEM     84,  96 

100%  Confidence 99,  101 

PERSONAL  INTEREST 

RULES  ..108,  111,  113 

Overcome    120 

PERSONAL   PROPERTY 

Appraisem.ent    105,  112 

As  security   159 

PETTY,  SIR  WILLIAM 93 

PLAYING  THE   STOCK 

MARKET    192 

"PLUTOCRATS"     146 

POPULAR  PHRASES 7,  8,  93 

POWER  OF  MONEY  destroyed  291 

PRICES,    high    7 

Defined    12.  88 

Edge  Act   11 

Fall     10 

Fluctuation     12,  87,  126 

Low     9 

PRINCIPLES,   AMERICAN.150.  295 

"PROFITEERS" 8.  307 

PROSPERITY,     defined     3 

Checks,  prosperity 

60,  78,   129,  219,  263 

Restored   149,  279 

Reverse    gear    on 60,78,257 


Page 
PUBLIC     CONTROL 

100.   118,   120.  278.  306 

Right  of    162 

PUBLIC   OFFICIALS 

should  act   184 

PUBLIC  UTILITY 

Railroad   and   bank 

35,   39.    128,    147 

Service  only  should  be  con- 
trolled      38,  100,  157 

PUMP   HANDLE    194,302 

PURCHASING    P0V7ER    OP 

DOLLAR    fixed     46 

Fluctuation     8^ 

PRIVATE   CONTROL,  of  mint  129 
"PRIVILEGE,"  bank  loan.. 121,  277 

PUJO    COMMITTEE 238 

RADICALISM     294,  308 

RAILROAD 

Compared   to   bank. ..  .36.  40.  41 
Effect      of      breakdov?n      in 

Mexico     41 

RATIOS 

Between    business    and 

money    91,  98 

Exchangeable    called   price. .   12 
REFORM,    attempted . .  .150.  217,  225 

Farmer    favors    198 

Laws  required. 136,  140,  141,  144 

Must  not  injure   bank 118 

Necessity    for    shown 

16,  32,  40.   65,   81.  311 

Object   of    48, 

100,    103.    117.    125.    136,    311 

Of  credit   65 

REIGN    OF   TERROR 171 

REMEDY  ...101,  118,  120,  125, 

136.    140,    141,    144,    231.    257 

Proposed  by  Shaw 185 

RENEWAL   OF   LOAN 161 

RESERVE,    amount    required..     74 

Explained    27 

Folly    of    289 

Limits   bank   credit 

28.  59,  73,  239 

May   be   suspended 74,  217 

Section     11-C 217 

RESERVE  SYSTEM 

Faults    of     73.  217 

Folly  of    239,  248 

Object     46,  73 

Reserves   credit    59.  77 

Used   as    check 120 


INDEX— Continued 


Page 
REVERSE  GEAR  ON 

PROSPERITY  ...60,78,267 

RIGET  to  bank  loan 120 

RIGHT  of  public   control 162 

KOEBERY     ..166,  814 

RULES,   for   loan... 124 

Federal    Reserve"  Board. 136,  144 

State  banks    186 

RURAL   CREDITS    19S 

Not   nccoss.iry    209 

Time    an    element 212 

"SAFETY  FIRST"   86.119 

1007c  secured   101,  121 

SAVINGS  ACCOUNT    73 

SECRETARY    OF    TREASURY 

SUAW   ....ISl,  192,  183,  186 
SECURITY 

Appeal  regardinK.  .110,  140,  141 

Appraised 104,    107,   109,   112 

Automobiles   as    6,  124 

Certificate  of  assessment. . .   113 

Farmers    105,  210 

Good  but  not  bankable. .  .2,  210 

Land     106 

Must  be  safe    124 

National   banks    136 

Personal     property  .104.  112,  159 
Percentage  of  loan  fixed...    115 
SELLING  PLANS 

Automobiles    6.  124,  157 

Banks,    co-operated 6 

Could  be  used 124 

Necessity  for   6 

SERVICE 

Only    controlled    38 

Of   Asses.sor    143 

Of  bank  and  railroad 38 

SHOEMAKER    illustration 207 

SLUMP  in  business 157,219 

SPECULATION     188 

Game   not  straiKht 189.104 

The  Game   192 

STABILIZE   THE    DOLLAR... 

46,  87,   118,  286 

STAR   CHAMBER  METHODS.   185 
STATE  BANKING  SYSTEM... 

116,    136,    140 

Rules  for  loans   186 

STATES    denied    coinage   right.    181 
STOCK  EXCHANGE 188 

Crooked   vrame    807 

SYSTEM  OUTGROWN. 79,   128,  280 


Page 
TABLE 

Comptroller's  of  medium  of 

exchange   21 

Of  value    85 

PercentiiKe    of    loan....  115,   136 

TARIFF 

Change  caused  panic,  why.     66 

TAX   appeal    HO.   141 

Reformed     Ill 

Do'l;:inK    stopped     107 

Equalization    109 

Remedy    no 

TAX,  assessment •  •  •  •   106 

TAX  PAYER,  justice  to Ill 

Risht  of  appeal...  110,   140,  141 

THIRTY   WORDS    144 

TIME  LIMIT  on  Loa.nj 209 

Cause    of    210,256 

Stops   exports    266 

TOBACCO   as   money 88 

TRANSPORTATION 

Compared    to   money 85 

Object   of    86 

TRUE   VALUE    107.  110.  Ill 

TRUSTS 287 

TURMOIL 

High    Cost    of    Living    and 

Low   Cost  of   Living 10 

Shows    wrong   exists 7,   149 

Ruaion   for 11,   46,    149,   310 

UNION   LABOR 148 

UNSECURED  LOANS  119 

Not  allowed   139 

URBAMTIS,  care  for   218 

USURY 166.  298 

See  Appendix 

liankera  guilty  of.. 166.  167,  171 

Call    monoy     301 

Division  of  loot   816 

Evils   of    298,  817 

Practiced   in   Middle  Ages..    166 

Present  method  of 170,171 

Profit    from    S16 

Terrible   resulU 168 

VALUE 

Divided   into  unit* 90 

Is  price      88 

Of    dollar    Btabilized. .  .46,  87.  96 

Of  gold    68 

Of    land    fixed 107,121 

Of  stocks,  etc 190 

Personal   property    104.112 

Table  of    86 


INDEX— Continued 


Page 

VERDICT  of  jury 142 

"VESTED  INTERESTS" 60 

VIOLATION     OF    CONSTITU- 
TION    133.228 

"VITAL  DEFECT" 186,  187 

VOLUME 

Of  business  and  money. .  .91,  93 

Of  medium  affects  life 130 

"WALL    STREET" 298 

Crooked  game   189 

Governs  country 155,  233 

WALLINGFORD    STORIES 

TAME    243 

WAR,    caused    inflation 13 

WAR  FINANCING  CORPORA- 
TION     4,  166 

Reinstated  for  farmer 4 


Page 

WEALi"H  has  no  power 291 

WUEAT  PIT 188 

WILLIAMS,  JOHN  SKELTON.   163 

See   Appendix    297 

Stopped  direct  usury.  .  ..173,  306 

Quoted     .  . .  166,  167,  168,  215,  297 

WORDS  necessary  for  reform..   144 

WORLD  CONDITIONS. . . .      16 

WRONGS 

All  are  victims   310 

Automobile  trade   7 

Exporter    5 

Farmer 6 

Source    not  understood 7 

YARD  STICK 

Compared  to   dollar 87 

ZERO  POINT  for  credit.. .  .77,  189 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


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